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Australian administrators seeking to take advantage of landlord standstill periods amid COVID disruptions

Since late March 2020 there has been a steady stream of voluntary administrators seeking the assistance of the court to limit their personal liabilities under the Corporations Act (Cth) 2001 (Act) by pointing to the social and economic disruptions and restrictions caused by COVID-19. Administrators have always had the option of seeking the court’s assistance to extend periods within which they are required to make key decisions in respect of major assets (or liabilities) and thereby potentially incur personal liabilities and, to convene meetings, conduct and complete investigations and issue reports to creditors. However, in more recent times, they have sought court intervention on a more a significant basis with the treatment of leases being one area of concern.

Administrators’ liable for leases

Section 443A (1) (c) of the Act makes administrators liable for debts they incur in the performance or exercise of their powers for property leased, used or occupied during an administration. However, under normal circumstances the liability is not triggered until five business days after the administration commences. In other words, pursuant to s 443B of the Act, the administrator is afforded an interim standstill period of five business days to make a decision in respect of his or her ongoing occupation or use of leased premises.

Courts prepared to extend standstill periods   

 The Act only affords administrators a very short period to make key decisions in respect of leased assets. However, recent decisions[1] suggest that courts are prepared to significantly extend those periods particularly in relation to companies exposed to sectors heavily impacted by COVID-19 including retail, hospitality and tourism. The extensions of decision periods ultimately also means that administrators are protected from personal liability and that lease payments are unlikely to be made (subject to any interim agreements).

In considering whether to grant extensions, courts have regard to the interest of creditors as a whole, and not just the landlords. Further, as far as landlords are concerned, it may also be a relevant factor that since the COVID-19 pandemic, many landlords have not been paid rent (or have only received part payment), in any event, since late March 2020. Accordingly, courts may be prepared to reasonably conclude that any landlord retaking possession of a retail or hospitality focused premises will be unlikely to be able to find a suitable tenant in the short to mid-term.

Landlords may still be entitled to priority payments

If administrators decide to continue to occupy leased premises for the purposes of their administration, then rent may be payable as an expense of the administration properly incurred in carrying on the relevant company’s business under s 556 (1) (a) of the Act. As such, if the company is not restructured via administration and ultimately falls into liquidation, the payment due to a landlord for any standstill period may be afforded priority under the Act. Accordingly, given the continuing economic and social uncertainty, landlords should be proactive in dealing with lessees in distress and in the event an administration ensures, they ought to engage with the administrators quickly in order to determine how best to protect their interests or reach interim agreements.

[1] See for example, Jahani, in the matter of Miniso Master Franchisee Pty Ltd (Administrators Appointed) [2020] FCA 1066

© Copyright 2022 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 211
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About this Author

Masi Zaki Corporate Attorney Squire Patton Boggs
Of Counsel

Masi Zaki is of counsel in the Restructuring & Insolvency Practice Group.

Masi is a restructuring, insolvency and dispute resolution lawyer, with experience in superior and appellate court litigation and alternative dispute resolution processes. He has also acted in advisory and transactional capacities in the corporate restructuring and distressed M&A space, across a range of industry sectors, including financial services, mining and resources, and property and projects.

61-2-8248-7894
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