Ipso Facto Provisions and how they affect you
Can I terminate the lease if the tenant of my Commercial or Industrial Property goes into Administration or Receivership?
Most leases have clauses which makes it an event of default and grounds to terminate the lease if certain insolvency events occur, like the tenant entering into administration, liquidation, receivership or schemes of arrangement (referred to as “ipso facto” clauses).
Such clauses were beneficial for landlords for they could terminate the lease and not have to wait around for an administrator, liquidator or receiver to finish their investigations or realise company assets.
However, these clauses may no longer be enforced or selfexecuting for agreements that come into effect from the 1st July, 2018 due to the recent amendments made to the Corporations Act 2001 (Cth). The changes will impact on landlords and parties to commercial agreements in general (e.g. supply and building contracts, etc…), in restricting the enforceability of such ‘ipso facto clauses’.
Landlord v Tenant
Ipso facto clauses, often seen in leases, allow a landlord to terminate or modify the lease (e.g. default interest) if the tenant enters into an insolvency event. They are also seen in a range of commercial agreements.
These clauses are aimed at protecting the rights of landlords where the tenant cannot or may not be able to perform their obligations under the lease due to financial issues, allowing the landlord to minimise the risk that could arise if the lease continued with an insolvent tenant.
The Ipso Facto Legislation seeks to achieve the opposite by ‘pausing’ the landlord’s right to terminate or enforce its rights under a lease on the grounds of the company entering into administration or receivership, to assist administrators and receivers to achieve a better outcome for creditors of a failing company – it enables them to, in certain circumstances, trade through their difficult period or provide time for the company to sell its assets and business in an orderly, non-fire sale, manner during the administration or receivership period (“stay period”).
The argument is, that the termination of leases under ipso facto clauses largely contributes to the demise of tenants’ businesses and prevents the sale of these businesses as a going concern. Directors have argued that if termination did not occur, they would have had the opportunity to restructure and potentially repair the company’s financial situation – rather than company assets being forcibly dealt with and as a result, not realising optimal value for the business.
When does the restriction apply?
A landlord cannot terminate the lease merely because the tenant:
- enters administration;
- has a managing controller appointed over all or substantially all of its assets (e.g. a receiver and/or manager); or
- is undertaking a compromise or arrangement for the purpose of avoiding liquidation (e.g. scheme of arrangement).
This restraint on the right to terminate will cease if the company is wound up by resolution or by an order of the court.
Landlords need to be aware of these changes, which come into effect from 1 July, 2018, and consider the impact that they will have on leases entered into after this date.
In doing so, landlords should review their lease documents to ensure their rights to terminate under non-ipso facto clauses are preserved. Whilst such legislation restricts rights to terminate under ipso facto clauses, existing rights and entitlements under the Corporations Act 2001 (Cth) and other legislation relating to both retail and commercial leases are not altered by these changes (e.g. continue to pay rent, maintain the property, permitted use, etc…)
However, one important thing to remember is that if you are a landlord and you enter into a new lease, variation or option after the 1st July, 2018 that you should not seek to rely on ipso facto provisions to modify the terms or terminate the lease, for in doing so you may have unlawfully terminated the contract and the tenant may then sue you for unlawful breach of the lease.
Much uncertainty remains in the practical operation of the Ipso Facto Legislation and it is likely that there will be further activity and explanation surrounding these changes in the months to come. Please contact one of our experienced lawyers for help regarding Ipso Facto Legislation.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.