Be wary of your landlord’s financial status when signing the lease

It is not uncommon for a landlord to make extensive investigations into a tenant’s financial situation, to minimise the risk that the tenant will fall into financial hardship and not be able to pay the rent.

But what if the landlord suffers financial hardship?  What then are the tenant’s rights?

Question

If a corporate landlord enters liquidation, requiring the liquidator to liquidate the company’s assets, the liquidator may form the view that a property asset may be easier to sell, or even be worth more, if it was not subject to a particularly lengthy and/or onerous lease.  In the 2013 decision of Willmott Forest, the High Court held that in that situation, the liquidator may have the right, on behalf of the company, to “disclaim” (that is, terminate) the lease, so that “clear title” can be granted to the purchaser.

This means that any apparent proprietary interest the tenant has in the property will not survive the termination of the contractual arrangement.

So take care if, during the course of your lease negotiations, you become aware of the potential for a corporate landlord to enter liquidation, even if it’s by way of a Deed of Company Arrangement by which the company is hoping to trade out of the poor financial position.  Further investigation of the landlord’s true position may be warranted before you enter into the lease and incur substantial expenses in the fit out.

Contact Melissa Lammers on 02 9526 3444 or mlammers@shirelegal.com.au if you have a question about leases.

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