Financial distress in property transactions and dealing with externally appointed entities

In brief – EAEs will not agree to usual warranties, undertakings or representations

If you find yourself dealing with an externally appointed entity (EAE) such as a liquidator, receiver, manager or administrator in a property transaction, remember that the EAE’s first duty is to the creditors of the defaulting party.

Appointment of EAE results from financial distress

In this uncertain market, it is not unusual for a party to a property transaction to encounter financial distress during the relevant property relationship.

In those circumstances, you might very well find yourself either considering the appointment of or dealing with an EAE. This article will highlight the special nature of the relationship of dealing with the EAE with a view to resolving issues and maximising the outcome for the non-defaulting party.

EAE often has limited knowledge of property or transaction

Dealing with an EAE in a property transaction can arise where the other party is a vendor, purchaser, landlord or tenant.

The first thing to appreciate in dealing with an EAE is that the EAE’s first duty is to the creditors of the defaulting party.

The second thing is that the EAE quite often has limited knowledge of all the surrounding facts, circumstances and documents related to the relevant transaction.

This means that the EAE will not be in a position (nor be prepared) to give the usual warranties, undertakings or representations that someone in the position of the defaulting party would normally give, particularly where there is a sale of a real estate asset.

Records may be lacking and directors may not provide information

Often, where a party has an EAE appointed, its records are defective and lacking. The EAE probably does not know much more than you do about the property and its characteristics, or the nature of any consents and the surrounding facts, circumstances and reports.

You also need to appreciate that in the role of the vendor, the EAE will often find it difficult (particularly in the case of a liquidation or administration) to get significant co-operation from the directors of the defaulting party to provide due diligence information and contractual warranties that a purchaser may normally seek when acquiring or dealing with a real estate asset.

EAE as vendor will not give usual warranties or undertakings

It often comes as a shock to parties dealing with an EAE selling property to find that the contract terms are broadly drafted, significantly limit the liability of a vendor and contain little or no warranties.

Further, you may well find that the EAE rejects your requests that it undertake various matters, agree to a retention amount until certain issues are addressed or warrant that certain things have been done in accordance with statutory requirements to the point of purchase.

If the defaulting party is the vendor, the purchaser must liaise urgently with the EAE with a view to convincing the EAE that it is in the interests of the vendor's creditor that the transaction proceed to completion.

EAE as purchaser may seek not to proceed with sale of property

If the defaulting party happens to be a purchaser, a vendor has to realise that it is likely that the EAE will seek to disclaim or not proceed with the contract. The vendor has to move quickly to liaise with the EAE to see whether the transaction is going to stay on foot, as the vendor has a legal obligation to mitigate its loss and obviously would wish to go back to the market if the EAE is likely to disclaim or not proceed with the contract, or if there is no prospect of the contract proceeding to completion due to a lack of funds.

There could be circumstances where the EAE may wish to proceed with the purchase, where the premises may be essential to the business of the defaulting party and where the EAE is seeking effectively to put to the market the package of the business and its underlying real estate asset, but this would be a most unusual circumstance.

EAE likely to continue lease if defaulting party is landlord

If the relationship is that of a tenancy, the circumstances are different depending upon whether the defaulting party is the landlord or the tenant.

If the defaulting party is the landlord, it is likely that the EAE will wish to keep the lease on foot so that the underlying property asset can be sold with the tenancy attaching to it. This is likely to increase the yield of and the return with respect to the property when sold by the EAE.

Effectively the tenant will then just have a different landlord following settlement. The position of the tenant should not be materially different except where there are positive obligations on the landlord to carry out works which may not have been done. The EAE may not have the funds to effect these works.

EAE as tenant not liable for arrears

Where the EAE is the tenant, in most circumstances the EAE will only keep the lease on foot where there is a real benefit. This would normally be where the business is to be sold and the property is needed for the carrying out of the business.

Leases allow for the termination of the tenancy if an EAE is appointed. There are moratoriums which apply where the tenant goes into voluntary administration and the administrator may elect to keep the lease on foot during the voluntary administration.

If the lease is kept on foot, then the EAE is only responsible for liabilities from the date of his or her appointment. It will not be liable for arrears. If there are arrears, this may be a bitter pill for a landlord to swallow, but highlights the need for landlords to be vigilant where tenants do not make payments strictly in accordance with the lease timeframe.

EAEs may have the right to disclaim any contract

Depending upon the nature of the appointment of the EAE, the EAE may have a right to disclaim any contract (ie state that, due to its appointment, it no longer intends to be bound by the contract).

Effectively, in those circumstances, all the innocent party can do is terminate the relationship and become an unsecured creditor for whatever monies are due or losses are incurred. Of course, landlords may well have rights against bank guarantees and possibly personal guarantees.

Obtain expert advice if an EAE is appointed in your property transaction

When dealing with an EAE, the maxim caveat emptor (let the buyer beware) should be foremost in your mind. Whenever dealing with an EAE, you basically have to satisfy yourself as to all matters before entering into a contractual relationship with the EAE, bearing in mind that the EAE will not agree to any of the usual contractual warranties, representations or undertakings due to its limited knowledge of the circumstances of the transaction and the background to entering into the transaction (or any of the characteristics or peculiarities of the property being dealt with).

Where an EAE is appointed, it is essential to move quickly and obtain expert advice on how to protect your interest and maximise the outcome from your perspective.