Wolters Kluwer recently hosted a webinar in which Justin Kang and Masi Zaki of Dibbs Barker shared their insights on the implications of the new safe harbour legislation on the right to terminate commercial and retail leases for an insolvency event.
The safe harbour legislation (the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth)) includes reforms to the use of ‘ipso facto’ clauses. Ipso facto clauses frequently appear in commercial and retail leases and usually provide the landlord with rights to terminate or modify a lease on the basis of the tenant’s insolvency event. If a landlord’s major tenant were to experience an insolvency event, an ipso facto clause in the lease would expressly entitle the landlord to terminate the lease and therefore avoid the risks that might arise from the lease continuing with the tenant in a precarious position.
For leases that are entered into/ renewed after 1 July 2018, there will be major restrictions on the enforceability of ipso facto clauses. The safe harbour legislation will mandate an automatic stay or ‘pause’ on a landlord’s right to enforce a clause to terminate or amend a lease solely because:
- the tenant enters administration;
- the tenant has a managing controller appointed over all or substantially all of its assets;
- the company is undertaking a compromise or arrangement for the purpose of avoiding liquidation.
However even when the stay does come into operation, a landlord could potentially still enforce its right to terminate on the basis of an ipso facto clause if:
- the landlord obtains the prior written consent of the relevant insolvency practitioner, or
- the termination is pursuant to an order of the court.
The webinar discusses some practical considerations for landlords and tenants in light of the new legislation, noting that:
- the ipso facto moratorium will not alter any existing rights and entitlements under the Corporations Act 2001 or related legislation concerning retail and commercial leases. The stay on the enforcement of ipso facto clauses will simply add an extra layer of protection for tenants experiencing an insolvency event.
- landlords should review their leases to ensure their rights to terminate on the basis of non-monetary and non-ipso facto clauses are clear and enforceable.
- with certain exceptions, landlords will still be able to exercise rights against third parties who have provided guarantees (e.g. bank guarantees) or other surety for the company, provided those rights are sufficiently provided for in the drafting of the lease conditions. Certain guarantors (directors and some of their relatives) will still be protected during the period of voluntary administration under existing legislation.
- landlords should take care in determining when and on what basis termination notices should be issued, particularly in light of the fact that the moratorium on enforcing ipso facto clauses is intended to protect the tenant.
- some landlords may wish to consider implementing measures to monitor key client performance against leases in an effort to not be caught off guard by a tenant’s announcement of a formal restructure.
The above points are further explored in the webinar “The safe harbour and its potential implications for commercial & retail leases”, 26 February 2018