What Happens To Your Business if Your Landlord Goes Broke?

What Happens To Your Business if Your Landlord Goes Broke?

What Happens To Your Business if Your Landlord Goes Broke?

In a recent case, the tenant had 25 year leases over various rural lands. The tenant paid the rent for some premises annually, and for other premises the tenant paid the rent entirely upfront for the full 25 years.

The landlord went broke and its creditors had it put into liquidation. The liquidator needed to sell the land to pay the landlord’s unsecured creditors. The land was only saleable if there was vacant possession and therefore the liquidator had to get rid of the tenants somehow. So the liquidator terminated (or “disclaimed”) the leases using Section 568(1) of the Corporations Act. The effect would ruin the tenants because the value of the fixtures put onto the land and the benefit of the early lump sum rent payments would go to the liquidator. The tenant would also lose their right to occupy the land.

The tenants sued the liquidator but the Court decided that liquidators can validly disclaim a registered lease. The tenant had to vacate the land without any compensation.

If you are entering into a long term lease some potential ways to safeguard your business would be to:

  1. Ensure your lease is registered

  2. Include a clause in your lease which stipulates that any property, fixtures or fittings brought onto the land by the tenant will not pass to the landlord until the landlord has paid the tenant the market value for all of the items.

  3. Ensure where possible that your landlord is financially stable so that liquidation of the landlord is less likely.

  4. Unless your landlord is completely financially rock solid, avoid paying rent upfront (even though it could be tax effective) as this could have negative consequences in the long run.

Before you enter into a commercial lease you should contact Fox & Staniland for some legal advice on your lease to protect you and your business’s interests.