With the number of companies entering external administration on the rise and the crucial post-Christmas retail trading period nearing an end, it is important for owners to ensure that they fully understand what rights they have to terminate a lease and recover unpaid rent if a tenant goes into external administration and its creditors then vote to enter into a Deed of Company Arrangement (DOCA).
If a tenant is in arrears and a DOCA is in place, can an owner exercise its contractual right to terminate the lease?
Yes. A DOCA will not prevent an owner from exercising the rights it would otherwise have as the owner of the property, so long as:
- the owner did not vote in favour of the DOCA; and
- a court does not make an order preventing the owner from taking back possession of the property.
This means that if an owner refrains from voting in favour of a DOCA and the tenant does not make a successful application to the court, the rights that an owner has to terminate the lease will not be impacted in any way by a DOCA.
Can an owner recover unpaid rent when a DOCA is in place?
Unfortunately, the only way an owner is able to enforce its right to be paid rent by a tenant (who is the subject of a DOCA) is for the court to grant permission to bring recovery proceedings.
The Corporations Act 2001 (Cth) provides that any creditor who has a claim against a tenant arising on or before the date of administration cannot commence legal proceedings against that tenant while a DOCA is in effect, except if leave is granted by a court to do so.
Where an owner is seeking recovery of unpaid rent which accrued prior to the date of administration, it is clear that an owner will be a “creditor” and that its claim for unpaid rent is one which arose on or before the date of administration.
But what about a situation where a DOCA has been entered into and it is only after the DOCA comes into effect that a tenant fails to make rental payments in accordance with the lease? The courts have held that leave of the court will still be required to commence recovery proceedings because an owner’s right to payment of future rent is a right that exists prior to the date of administration even though payment is not required to be made until later by the tenant.