On 13 June 2017 the Australian Financial Review published an article titled “SumoSalad uses Insolvency Laws to fight Scentre’s Westfield”.

The article reported on the appointment of administrators to Sumo Westfield Leasing Pty Ltd (in administration) and Sumo Leasing Pty Ltd (in administration). The article refers to failed negotiations with landlords and quotes Luke Baylis of Sumo Salad as saying “placing the leasing entities into voluntary administration is the only way to protect our franchisees, and we are confident this will help us restructure our leasing entities in a manner that will create more favourable conditions for our franchisees”.

Can directors “use insolvency laws” and appoint an administrator to better the company’s position or negotiate with a landlord?

When can an administrator be appointed? 

The Corporations Act 2001 (Cth) specifies when an administrator can be appointed by a board. The board must form the genuine view that the company is insolvent, or likely to become insolvent. Appointing an administrator for an ulterior purpose will render the appointment invalid (in the absence of a curative order by a Court).

An inability to renegotiate rent and outgoings to a financially viable level may trigger an administration, however, if it means the lessee company is insolvent or may become insolvent.

This is particularly where lease obligations form the most significant financial obligations of an entity. This structure exists often in retail groups which include specific “leasing” entities leasing multiple sites.

What are the effects of an administration on company leases? 

The first and immediate effect is to provide a moratorium against distress for rent or recovery of possession of the leased premises during the period of the administration: section 440B Corporations Act. This relief is unique to an administration and is often a reason directors choose appointment of an administrator over other forms of external administration.

The next effect is to provide 5 business days “breathing space” during which the administrator can decide whether to continue occupation or not. At the end of those 5 days the administrator becomes personally liable for rent (unless the company ceases possession or use). The 5 days gives the administrator some limited time to trade and negotiate terms with the landlord. The 5 days are essentially “rent free” in that the liability becomes a claim in any later winding up but is not personally claimable against the administrators.

The administrator would then likely negotiate further terms to apply if the company seeks to continue its existence by executing a deed of company arrangement (DOCA). Whilst the restriction on landlord enforcement ceases once a DOCA is signed (absent court order), a commercial resolution may be negotiated. This is necessary to ensure the DOCA is viable. Landlords faced with likely vacancies across multiple sites may be prepared to negotiate arrangements to keep those sites occupied. Relevant commercial factors will include:

  • How many sites are leased by the insolvent lessee and are these with the same or different landlords?
  • In the retail space, how important is the particular lessee to the tenancy mix of centres?
  • What will be the extent of losses if premises are vacated and what portion is secured (e.g. by bank guarantee)?
  • How readily can the premises be re-let? What vacancy rates apply and was the lease at market rent?

Conclusion 

In summary, yes - Australia’s insolvency laws do provide some protection and relief in respect of property leases during a voluntary administration. However most of that relief is short term. Commercial factors will influence the significance of any long term relief.