Landlords beware – Ipso facto reforms further restrict your rights on insolvency default

On 1 July 2018, the new Insolvency Law reforms in relation to the restrictions on “Ipso Facto” clauses came into force (see new s.415D, s.434J and s.451E of the Corporations Act).

In short, the Ipso Facto reforms create an automatic stay on a party’s right to enforce a provision to terminate or amend a Contract (including a lease or a licence to occupy) solely because the counterparty enters into a particular insolvency event (specifically a Scheme of Arrangement or Voluntary Administration, or a Receiver and Manager is appointed).  Further, a party’s right to enforce will be stayed if they are relying on the financial position of a company experiencing an insolvency event, or a reason which is, in substance (even if not in form), an insolvency event.

A typical “Insolvency Event” default clause in a lease:-

The Landlord may terminate this lease if:

1. the rent is unpaid for 14 days after becoming due for payment; or
2. the tenant is a corporation and:
   1. an order is made or a resolution is passed to wind it up;
   2. it goes into liquidation; or
   3. a receiver or receiver and manager is appointed over any of its assets or an administrator is appointed.

What restrictions will apply to Landlords?

The effect of the reforms, using clause (b)(iii) above as an example, is that upon the appointment of a receiver (where the receiver is appointed over the whole or substantially all of the tenant’s property), or an administrator, the Landlord cannot enforce its right to terminate the lease. There will be an automatic stay on the right to enforce. Despite the insolvency event, if the tenant (now controlled by the Insolvency Practitioner) continues to comply with its obligations under the lease, a Landlord cannot terminate. Such clauses in leases are not unlawful, they just cannot be enforced if a stay is applicable.

Contract exemptions under the Regulations and Declarations

The Corporations (Stay on Enforcing Certain Rights) Regulations and Corporations (Stay on Enforcing Certain Rights) Declaration provide no joy for Landlords either.  Whilst they specify exemptions from the new reforms, there are no specific exclusions or special declarations for leases.

General exceptions applicable in a Landlord/tenant relationship include circumstances where:

1. a receiver or other controller is appointed but not over the whole or substantially the whole of a tenant’s property;
2. the tenant enters into a deed of company arrangement; and
3. a tenant enters into liquidation (not immediately following an administration or scheme of arrangement).

In these instances a Landlord would be entitled to act in accordance with an “insolvency event” default clause and terminate the lease.

Can a Landlord still serve a Notice of Default, even if it cannot act on it during the stay?

There is nothing specifically preventing a Landlord from serving a notice of default but given it cannot exercise its rights to take further action there may be little utility in doing so. Further, if the notice of default is interpreted as a purported termination of the lease then the tenant may claim the Landlord has repudiated the lease and may be entitled to sue for damages.

When can a Landlord take action during a stay?

A Landlord can take action:-

1./        if there is a default other than an insolvency event. eg. if the tenant does not pay rent;

2./        with the consent of the insolvency practitioner; or

3./        with the leave of the Court.

How long is the stay for?

The length of the stay will depend on the type of insolvency event applying to the tenant.

Subject to the below, the stay will generally end when the voluntary administrator, scheme administrator or managing controller is no longer appointed.

The stay does not apply if a tenant immediately goes into liquidation. However, what is the case if the tenant goes into administration and then enters into a Deed of Company Arrangement, or subsequently goes into liquidation? The following will apply:

1. Stay will apply for the length of time an administrator is appointed;
2. Stay will not apply if a deed administrator is subsequently appointed; and
3. Stay will apply until the end of the liquidation if a liquidator is appointed following an administrator (but not following a deed administrator).

Can you rely on a past insolvency event to take action once the stay has ended?

Whilst the stay may end, the right to enforce for the “insolvency event” breach is unenforceable indefinitely.

What should a Landlord do?

Given that the stay does not apply to termination clauses where the tenant has defaulted for reasons other than an insolvency event occurring, Landlords are advised to take swift action following breaches of a different nature. For example non-payment of rent.  Landlords are able to terminate a lease for such a reason despite an insolvency event taking place.

Acting quickly is also important because if the tenant subsequently experiences an insolvency event, a Landlord will be prevented from acting in response to other breaches of the lease (eg. non-payment of rent) if the Landlord was primarily prompted to do so because of the insolvency event.

No doubt Insolvency Practitioners will be quick to advise when they believe the stay is triggered, however, a Landlord should review for any other breaches, and seek legal advice if they still wish to pursue recovery of the leased premises.

Authored by: 
Rob Hinton, Partner
Louise Rhodes, Special Counsel