This article was co-authored with Erin Gordon.
Part 1 of this series discussed the ‘stay’ imposed on landlords during an administration, preventing landlords from enforcing against leased property whilst the administration is on foot. This includes taking possession of leased property or otherwise enforcing their security interest in the leased property.
This ‘stay’ is lifted once the administration process comes to an end and the landlord can usually recover its leased property and enforce its rights under the leases.
However, if there is a Deed of Company Arrangement (DOCA) in place, the situation can become more complex for landlords seeking to enforce their rights where the DOCA contemplates continued occupation of the landlord’s premises.
To conclude this three-part series into navigating the external administration process for landlords, we explore restrictions on enforcement by landlords during the administration process, specifically during the operation of a DOCA.
DOCAs
Once a company enters voluntary administration, any person (directors, shareholders or third parties with an interest in investing in some part or all of the company’s business or assets) can propose a DOCA.
A DOCA is a statutorily binding agreement between a company and its creditors which governs how the company’s affairs – in particular, its property and liabilities – will be dealt with.
A DOCA generally aims to provide creditors with a better return than an immediate winding up of the company and maximises the chances of a company and all or some of its business continuing to operate.
Commonly, a DOCA will release the company from all its debts and in return, creditors will be able to participate in a DOCA fund (sometimes established in a separate trust), receiving cents on the dollar on their claims.
If a majority of creditors vote in favour of a DOCA, the company has 15 business days after the creditor’s meeting to sign the deed or the company will automatically go into liquidation. The Deed Administrator is the person who ensures the company carries out its commitments under the DOCA, as well as lodging annual accounts and other financial documents with ASIC.
The DOCA will bind all creditors, even if they voted against the proposal.
Enforcing rights to recover leased property while a DOCA remains on foot
For any landlord that did not vote for the DOCA, the binding effect of the DOCA will not affect its rights to its property.
Rather, despite the terms of any DOCA approved by creditors, any landlord that either votes against or abstains from voting for the resolution to approve a DOCA, can take possession of its property and otherwise enforce its property rights under any lease.
However, those rights can be restricted by orders made under section 444F(4) of the Corporations Act 2001 (Cth) (the Act).
Section 444F(4) of the Act gives power to the Court to order the owner or lessor of property that is used or occupied by, or is in possession of, a company under a DOCA not to take possession of or recover its property.
To make such an order, the Court must be satisfied that:
- if the owner or lessor was to take possession or recover the tenant’s property, it would have a material adverse effect on achieving the purpose of the DOCA; and
- the interests of the owner or lessor will be adequately protected having regard to the terms of the DOCA, the terms of the proposed order (which usually sets out the tenant’s obligations to pay rent and outgoings during the proposed period of continued occupation) and any other relevant matter.
Adequate protection of landlords – key principles
The phrase “adequately protected” is not defined in section 444F(4) of the Act and it is necessary to look to the case law to understand its meaning and application.
This issue was discussed in the recent Victorian case of Vincent Cold Storage Pty Ltd v Centuria Property Funds No 2 Limited (No 2) [2023] VSC 314, where a lessor faced increasing difficulty recovering its property and unpaid rent and outgoings from a company under administration and later a DOCA.
The Court identified the key principles for determining an application under section 444F(4). In summary:
- The reference in the section to the “interests of the owner or lessor” refers to its economic or commercial interests, rather than its legal interests.
- “Adequately protected” relates to the economic or commercial adequacy of the protection but is not to be confused with “perfectly” or “completely” protected. It is for the DOCA administrator to establish that the landlord is adequately protected.
- The Court’s power is limited to preventing an owner or lessor from taking possession of property or recovering its property and cannot otherwise interfere with any other rights that the owner or lessor might have in relation to the property (for example, it cannot prevent a landlord from terminating the lease or seeking to set aside registration of the lease).
- The Court has an unfettered discretion but must exercise its discretion judicially.
Below, we explore the Vincent Cold Storage decision as a useful example of how the principles are applied in practice. We also touch on the broader lessons arising for landlords.
Adequate protection case study – Vincent Cold Storage Pty Ltd v Centuria Property Funds No 2 Limited
Centuria Property Funds No 2 Limited (Centuria) was the owner of a warehouse and storage facility in Victoria. They leased the premises to Vincent Cold Storage Pty Ltd (VCS) and Vincent Transport Services Pty Ltd (VTS) for a period of 5 years commencing 1 December 2019.
In October 2022, Centuria terminated the lease based upon the lessees’ failure to pay the rent and outgoings in the 5 months prior. The parties came to an agreement to pay the outstanding rent and outgoings in exchange for additional time to vacate the premises. However, the lessees failed to comply or take any steps to vacate the premises.
On 31 January 2023, VCS appointed voluntary administrators and relied on statutory restraints discussed in Part 1 of this series, to prevent Centuria from retaking possession of the premises. The parties instead executed a licence agreement for use of the premises, under which VTS vacated the premises but VCS again failed to comply with.
VCS then entered a DOCA, which contemplated VCS remaining at the premises until such time as it was able to secure new premises for its business. Upon execution of the DOCA, which signalled the end of the administration, Centuria attempted to take possession of the premises but was denied by VCS. Centuria then filed an application seeking possession of the premises on the basis that VCS had occupied the premises as a trespasser and made no payment in respect of its occupation since the end of the licence agreement.
The Deed Administrator sought orders pursuant to s 444F(4) of the Act preventing Centuria from taking possession of the property until the Deed Administrator provided notice that VCS had vacated the premises, on the basis that it would have a material adverse effect on achieving the purposes of the DOCA as VCS did not have alternative premises available to move and continue its operation in the near term.
VCS’ Deed Administrator proposed several conditions for VCS’ use of the premises under a new licence agreement, which was submitted would adequately protect Centuria’s interests; including monthly payment of a licence fee, the ability to terminate the agreement upon liquidation of VCS, failure to pay an invoice and remedy a default, and requirements for VCS to leave the premises in a ‘clean and tidy state’ amongst others.
Centuria argued that based on VCS’ history and the evidence regarding the limited availability of alternate premises, only payment of the full amount of the licence period in advance was sufficient to protect its interests.
The Court was able to distinguish this case from previous cases, as there was existing default under the lease before administration, the lease was terminated well before the DOCA was signed and the lessee continued to operate its business without paying anything for a substantial period, save for a small portion of the proposed licence fee.
The Court noted that whilst case law would suggest the adequacy analysis to be undertaken is by reference to the interests that Centuria had under the lease immediately before termination, in this case the question of adequacy should be by reference to the interests of an owner of premises unaffected by the lease which had been terminated because of default months prior to administration.
Some of the factors the Court considered when determining whether Centuria’s interests would be ‘adequately protected’ included:
- State of the premises - the Court noted that the proposed condition for leaving the property in a clean state and removal of inventory is not the same as leaving the premises in the same state as at the commencement of the lease. Regardless, his Honour was not satisfied that VCS had the capacity or incentive to cause third parties to remove their stock and property from the premises.
- Quantum of compensation - in this case the proposed licence fee offered an amount inclusive of GST and outgoings that was equal to market estimates exclusive of GST and outgoings. His honour found that the proposed compensation was not comparable to market rates.
- Payment history of the lessee - due to VCS’ previous non-compliance, the Court found there is no certainty that the amounts stipulated in the proposed conditions would be paid. In addition, VCS’ was indebted to Centuria with respect to unpaid rental in an amount in excess of $1 million of which around $900,000 would remain unpaid even if the DOCA was implemented.
- Lessee’s cash flow - the Court found there was no evidence as to VCS’ current financial position and whether it would have adequate cash flow to pay the amounts required.
- Security - the Court noted that there was no assurance, undertaking or security provided in respect to the payment amounts.
- Length of any agreement or conditions - his Honour noted that it is inapt to compare rent from a short term occupier to a long term occupier whose requirement to pay rent appears in a longer lease.
- Commercial relationship of the parties- in this case the commercial relationship of the parties had completely broken down, with his Honour noting that the proposed regime which required the parties’ co-operation and interaction was likely “problematic, if not unworkable”.
- Enforcement options - his Honour found that in the likely circumstance that VCS’ are unable to find alternate premises, it was not sufficient that Centuria would be required to terminate the licence and return to Court, leaving them in a similar, if not worse, position to where they are now.
The Court was ultimately not satisfied Centuria’s interests would be adequately protected by the Deed Administrator’s proposed conditions.
Landlords’ considerations
Landlords should carefully consider any DOCA proposal which involves the tenant company continuing to occupy or use its property during the period of the DOCA.
Depending on the circumstances, the landlord may be willing to allow the tenant company to continue to occupy its property under the DOCA on terms which adequately protects the landlord’s commercial and economic interests.
As such, a landlord may wish to consider providing feedback to any DOCA proposal as to how its commercial and economic interests can be adequately protected.
Any DOCA proposal which does not adequately accommodate those interests for the purposes of continued occupation of the landlord’s premises will struggle to obtain an order restricting the landlord from exercising its property rights. This will be particularly so where the landlord foreshadows those matters in advance.
The extent to which any of the factors discussed above will demonstrate that a lessor’s interests are ‘adequately protected’ are fact specific and will change depending on the relevant circumstances.
It should also be observed that even if the Court considers that a lessor’s interests could be adequately protected, it is within the Court’s discretion as to whether to make an order under section 444F(4) having regard to the terms of the DOCA, the terms of any proposed order, or any other relevant matter.
As discussed throughout this series, to protect its interests in the situation of tenant voluntary administration will require the pro-active engagement by the landlord with the voluntary administration process.
