A recent Victorian Court of Appeal case has highlighted that a tenant with a lease is not always secure. In Willmott Forest Ltd (In Liquidation) the Court confirmed that the liquidators of that company were entitled to terminate leases in order to facilitate the sale of the property and the liquidation of the company leaving the tenants out on the street with only a right for damages along with all the other creditors of the failed company. The case highlights the potential vulnerability of tenants when their landlords go into liquidation.
The practical considerations from this case are that in order to better protect themselves tenants needs to:
- Be satisfied that the landlord is financially sound;
- Ensure their leases are not uncommercial or significantly below market value;
- Be satisfied that the lease does not contain financial obligations on the landlord which are disproportionate to the rent received;
- Avoid over capitalising on leased property. For example where a property requires significant capital investment rather than negotiating a low rent and the tenant pays for the capital improvements, a more prudent course might be to have the landlord pay for the capital improvements and the tenant then pay a market rent; and
- Take incentives as upfront payments or contributions to fit out works at the start of the lease rather than as rent abatements throughout the term of the lease.
In addition tenants should take the usual precautions of registering their leases with the Titles Office to gain the benefit of indefeasibility though, as the Willmott Forest Ltd case shows, this is not absolute.
The law however is not entirely in favour of liquidators. Tenant’s can resist attempts by liquidators to disclaim their leases where the benefit to the liquidator and the company’s creditors is disproportionate to the detriment suffered by the tenant.
As a tenant, your best protection is for your lease to be an asset which adds value to the property rather than a liability. As an asset, it is in the liquidator’s interest to retain the lease. A tenant is most exposed where the lease makes the property unsaleable or significantly reduces its value.
If you find yourself in the position where your landlord goes into liquidation, you need to seek legal advice as to your rights if the liquidator attempts to disclaim your lease.