In brief - Retail landlords should continue to be mindful of recent changes to NSW retail legislation and all landlords generally will need to be aware of upcoming reforms in insolvency law
This article explores:
- some of the changes made to the Retail Leases Act 1994 (NSW) as at 1 July 2017 and how a key change may impact landlords over time; and
- the upcoming ipso facto reforms within insolvency law, which are intended to take effect on 1 July 2018.
Ipso facto reforms
My tenant has gone bust. Can I still terminate the lease?
The Federal Government has for some time considered amendments to the insolvency regime in the Corporations Act 2001
to maximise the chances of recovery of businesses in financial distress. Recent amendments to the Corporations Act
have introduced a prohibition on the enforcement of ipso facto clauses in certain circumstances.
What are ipso facto clauses and why has the government introduced a prohibition on their enforcement?
Ipso facto clauses typically allow for the termination of a contract, or amendment of the contractual terms, if the other party to the contract enters into an insolvency administration. Such clauses are standard in many commercial contracts and are considered essential to protect the interests of the contracting parties as it allows them to control the contractual relationship following the insolvency of a counterparty.
For example, an essential supplier of goods or services to a company that appoints an administrator has a very strong role in any potential rescue of the business, if the supplier is able to impose its own commercial terms in exchange for continuing with its contract. If the ability of the supplier to terminate the contract is taken away, the bargaining position of the company in administration, and therefore the chances of recovery of the business, are markedly improved.
The policy behind the prohibition is to maximise the chance of businesses in financial distress to either trade their way out of trouble, or find a purchaser, without having to worry about essential contracts being terminated or having onerous terms imposed.
How will the prohibition work?
If a right arises by express provision of a contract, agreement or arrangement, that right cannot be enforced against a company for the reason that:
- it enters into voluntary administration
- a managing controller (which includes a receiver and manager) is appointed over the whole or substantially the whole of the corporation's property, or
- it publicly announces that it will be making an application to enter into a scheme of arrangement for the purpose of avoiding being wound up in insolvency
It is important that the qualifying language relates to the reason for enforcing the right. This is a substance test, rather than form. In other words, the stay extends beyond termination provisions to any right that is being enforced because the company is in, for example, administration. In practise, this means that it will be important to be able to establish that the reason for enforcing any right after appointment is for a reason other than the appointment.
What does this mean for my lease?
A premises lease is usually one of the most important contracts for any business. The ability of a landlord to control access to the business premises after an administration is essential to the chances of a business continuing after administration.
It is almost universal that leases contain provisions allowing the landlord to terminate the lease upon an "insolvency event", which will be drafted to include appointment of administrators or receivers. A lease may also enable the landlord to amend the commercial terms upon such an event, such as terminating rent free periods or requiring adjustment for fit out contributions.
Before these amendments, the appointment of administrators to a tenant restricted the right of a landlord to take possession of the premises during the administration period, but otherwise didn't restrict the landlord's rights upon the breach. Appointment of a receiver is also a breach, allowing the landlord to terminate the lease. In both cases, the long-term possession of the premises was in the control of the landlord.
Under the amendments, so long as the tenant company complies with its obligations under the lease, the landlord will no longer be able to terminate the lease due to the appointment of administrators or receivers. As a result, the commercial options open to landlords will be significantly reduced.
What should landlords do?
The amendments come into force on 1 July 2018, unless the act is proclaimed earlier. The provisions will apply to contracts entered into after this date. Such contracts will need to be carefully reviewed in light of the legislative changes to seek to protect parties' legitimate interests without falling foul of the ipso facto stay provisions.
RETAIL LEASING UPDATE
When were changes made to the Retail Leases Act 1994 (NSW)?
On 21 February 2017 the NSW Parliament passed the Retail Leases Amendment (Review) Bill 2017, amending the Retail Leases Act 1994 (NSW) (Act). The changes to the Act came into effect on 1 July 2017 and so have been in operation for some eight months.
What are some of the main changes to the Act?
The changes to the Act were the most extensive in 14 years, though some in the industry had sought even more far-reaching changes. For example, to increase efficiencies the Real Estate Institute of New South Wales had lobbied extensively for the introduction of a standard mandatory lease for certain retail shops (similar in concept to the standard residential tenancy agreement). This did not happen and instead a number of less radical changes were made to the Act. As landlords are aware, key tenant-friendly changes made to the Act include:
- bank guarantees: requires bank guarantees to be returned within two months after the tenant has performed all obligations;
- disclosure of outgoings: changed the definition of outgoings and requires the landlord to give full disclosure in the Disclosure Statement of all outgoings, otherwise the landlord cannot recover undisclosed outgoings;
- mandatory lease registration: mandates registration of leases that are for a term of more than three years, and requires lodgement for registration within three months of execution; and
- increased access to NSW Civil and Administrative Tribunal (NCAT): the financial jurisdiction of NCAT increased from $400,000 to $750,000.
Which change could be the most significant to retail leasing?
In our view the most substantial change made is the increase in the financial jurisdiction of NCAT to $750,000. This is a possible benefit to more significant tenants (with higher value leases). As NCAT is a much simpler and more cost-effective venue to litigate a dispute (as opposed to the cost and uncertainty of court litigation), the change allows even substantial tenants with sizeable disputes to more easily and cheaply pursue claims against a landlord in NCAT.
The impact of this change remains to be seen, but it is expected that the expansion of NCAT's jurisdiction will lead to a higher number of claims against landlords brought in NCAT, and this is likely to be evident when the data presented by NCAT in the NCAT Annual Report 2017-2018 is compared against its 2016-2017 annual report.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.