Landlords rights in insolvencies - the right to distrain

When businesses are solvent, landlords’ rights are conferred by and derived from terms of a lease. In the normal course of events, a lease can be terminated by a landlord for non-payment of rent.

Alternatively, landlords in South Australia may exercise their implied right, by virtue of Section 125(1) of the Real Property Act 1886, to distrain against assets of the business, unless expressly excluded by a provision in the lease agreement. The procedure to effect a distraint is governed by the Landlord and Tennant Act 1936 and is not in itself a termination of the lease.

However, when a company, or any other entity to which the Corporations Act applies, becomes insolvent, the right to distrain will be affected by the appointment of an administrator.

According to the relevant Corporations Act provisions, it appears that in a Voluntary Administration, a landlord cannot terminate a lease, but may be able to distrain for rent. This position on the right to distrain is untested, but appears to contrary to the objects of Part 5.3A, as stated in section 435A of the Corporations Act.

According to section 468(4) of the Corporations Law, once the winding up of a company has begun, whether by court order or by resolution, a landlord cannot put a distraint in place for unpaid rent. The same applies in the case where a company is subject to a Deed of Company Arrangement (DOCA), by virtue of s 444E(3), but a landlord can terminate the lease unless there is an agreement not to in the DOCA to which the landlord has voted in favour.

Macks Advisory is a firm that practices exclusively in the areas of insolvency and business reconstruction and members with queries are invited to contact Peter Macks on 08 8231 3323 or by emailing pmacks@macksadvisory.com.au.