The ‘killing season’ has come early to retail this year, with David Jones calling in the administrators after rent negotiations with its landlords broke down. It is an unfortunate reminder for landlords that a tenant's financial distress can become a formal insolvency almost overnight, particularly once the tenant's financier withdraws its support.

Many of the rights landlords would normally rely on under your lease are put on hold once administrators are appointed. Knowing what changes, and moving quickly, can make a real difference to what you recover and how much control you keep over your premises.

What happens when administrators are appointed

An independent administrator takes control of the tenant's business in place of its directors. While investigating the company's affairs, the administrator can keep trading, sell the business or wind it down.

Creditors, including you, meet for the first time within eight business days. Some weeks later, at a second meeting, creditors vote on the tenant's future. The options are a deed of company arrangement (DOCA), liquidation or, rarely, handing the company back to its directors. In larger administrations, the Court often extends this timetable.

Don't change the locks

While the administration is running, you cannot re-enter or retake possession of your premises without the administrator's written consent or the Court's permission. You also can't levy distress for rent or otherwise enforce against the leased property. Taking matters into your own hands risks breaching the Corporations Act.

What to do: If you already have grounds to terminate, speak to us early. Acting before administrators are appointed may be your best opportunity, if the lease and the facts allow.

Insolvency is not a breach

Traditionally leases let you terminate if the tenant goes into administration. However, for leases entered into since 1 July 2018, the law generally stops you relying on that clause alone. You cannot terminate just because administrators have been appointed or because of the tenant's financial position, and the Federal Court has confirmed this protection can continue into a later liquidation.

What to do: Look for other grounds, such as continuing non-payment of rent, other ongoing breaches, abandonment or breach of a trading covenant. Rights of set-off are also generally unaffected.

Know when the administrator becomes liable for rent

• For the first five business days, the administrator is not personally liable for rent.
• After that, if the administrator keeps using your premises, they become personally liable for rent from that date (not any arrears) for as long as they continue to use the premises. The administrator can write to you at any time to say they no longer require the premises.
• Within those five business days, the administrator can tell you they do not intend to use the premises. If so, the administrator is not personally liable for rent while the notice is in force, although the tenant still owes you all amounts under the lease.

Watch out for two things. First, that notice does not end the lease and is not a disclaimer. If you want to terminate, you still need to serve your own notice, and you should get the administrator's express written consent (or the Court's permission) before you change the locks.

Second, administrators of large retail groups increasingly ask the Court for more time before they become personally liable for rent, which can put real pressure on your cashflow. Landlords are usually given liberty to apply to vary those orders, so engage early if an extension would cause you significant loss. The good news is that the Federal Court has held that rent accruing during this ‘standstill’ period can rank as a priority expense, ahead of ordinary unsecured creditors.

Check your security before relying on it

Use your vote as a creditor

Landlords are almost always key players in a retailer administration. An administrator who wants to keep trading, sell the business and/or restructure it usually needs your support, and that gives you leverage. To make the most of it.

Your six-point checklist for landlords

1. Act early. Your options narrow sharply once administrators are appointed.
2. Don't re-enter without the administrator's written consent or the Court's permission.
3. As you can't rely on your lease's insolvency clause, identify other grounds instead.
4. Diarise the five-business-day rent window and watch for any application to extend it.
5. Check your bank guarantees and PPSR registrations now, before you need them.
6. Treat any DOCA as a commercial negotiation and protect your future rent.

If one of your tenants is showing signs of financial distress, or has already appointed administrators, our team can help you protect your position.