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Protecting your rights over an insolvent commercial tenant

By Greg Bell

If you own a commercial property, one of your biggest concerns – especially in the time of COVID-19 – may be that your tenants can no longer pay the rent and have become insolvent. Of course, while this is an understandable fear, you likely have a number of protections in place to give you legal rights in this situation, and those should help you face down concerns.

The first thing to know in this kind of situation is that many of your rights are likely spelled out in the lease you signed with the tenant when they first moved in. While this agreement may have been updated over time, your rights probably haven't changed that much, and in any standard lease agreement of this type there are likely "ipso facto" clauses that go into effect in the specific event of tenant insolvency.

First things first: Who pays the rent?

Perhaps the biggest concern about a commercial tenant becoming insolvent is that they may still occupy the space for some time, but would not be able to pay rent on it. In some cases, you may find yourself waiting for a practitioner or administrator to be appointed, but that party will be responsible for covering rent beginning five business days after they are appointed – and until the tenant is no longer on the premises.

However, if a liquidator is appointed in the insolvency, that party is not responsible for rent during that period or any back rent the tenant may have accrued in the run-up to becoming insolvent.

With all this in mind, it should be clear that commercial landlords should not expect to receive the full amount they are owed on any back, current or future rent in the event of insolvency. To get as much as possible back, you will need to file a proof of debt.

Can you do anything with the property during that time?

As a general rule, it will not help the situation for a landlord to try to force the issue with trying to regain control of the property while it remains occupied.

Whether you are even able to gain access to the premises of the building at all may hinge on whether your tenant has gone into administration or liquidation. In fact, even the latter case can come with complications, such as if the liquidator assigned to the tenant does not disclaim the premises. The option of terminating the lease altogether is likely in your rental agreement, but this situation can vary.

Terminating during a period of administration is less cut-and-dried, and you may need to wait to receive approval to do so.

Are you able to seize any property?

In some cases, you may wonder if you are able to take any property that is in your commercial space to help you recoup some of the costs, but this is not straightforward either. Typically, your tenant will be required to remove all property on its own and ensure the space is left as it was when they first moved in, but in some cases, that property may be left behind – particularly if it is technically owned by a third party – and seizing it could create legal complications for you.

What should you do?

When this kind of unfortunate situation arises, it's likely that no one involved is happy to be going through it. In most cases, the best you can do is try to stay in touch with your tenant and keep up to date with the latest news and developments related to their finances and the legal proceedings surrounding the insolvency. And when it comes time to deal with an administrator or liquidator, your focus should shift to dealing with them.

If you need more information or have any questions, contact Ray White Surfers Paradise to learn more about how we can help. 

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