FEATURE

Selling leasehold assets

Tips and traps
Brendan Wyhoon Partner, Middletons

he sale of a leasehold asset brings a number of special challenges for secured creditors and the insolvency

sell the leasehold asset. a properly drafted lease will contain clauses that clearly outline: the consequences of an insolvency appointment and whether such an appointment is a default and/or gives rise to a right to terminate the lease; the procedure for assignment of the tenants interest in the lease to a purchaser; who owns the fixtures, fittings and other property at the leased premises; and whether the landlord has any right of first and/or last refusal in relation to the leased premises or the business being operated from the leased premises. all of these clauses can potentially impact on the secured creditor and the insolvency practitioner.

practitioners they appoint to realise such assets. this article takes a practical look at some of these challenges, offers a number of tips and highlights some potential pitfalls for people practicing in this area.

The concept of agency

Michael Forrest Partner, Middletons

it is important to keep in mind the laws of agency when dealing with leasehold assets. receivers and managers appointed by the secured creditor should, if documents are properly prepared, be agents for the tenant company and not for the secured creditor. on the other hand, if the secured creditor goes into possession and appoints insolvency practitioners as agents to assist with that process, those practitioners are agents for the secured creditor and not for the tenant company. this basic distinction is important to remember when faced with any of the issues discussed further in this article. it is also too simplistic to say that the receivers agency comes to an end upon the appointment of a liquidator to the tenant company. the case law in this area makes it clear that receivers continue to have the ability to bind the company postliquidation but only to the extent necessary to deal with the secured assets and not in a way that incurs liability on the part of the company.1

Has the landlord agreed to limit its rights?

Despite what the lease says, it is common practice for secured creditors to enter into an agreement with the landlord and the tenant borrower via tripartite agreements to limit the landlords rights in the event the secured creditor needs to take enforcement action against the tenant. although they exist in various forms, common clauses in these types of agreements include: an acknowledgement by the landlord that enforcement action by the secured creditor (eg going into possession or appointing a receiver and manager) is not a breach of the lease that would allow for termination of the lease;

What are the terms of the lease?

the terms of the lease itself are fundamental to the task given to the insolvency practitioner to

1 Re Leslie Homes (Aust) Pty Ltd (1984) 8 aclr 1020.

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obligations on the landlord to provide notice of breach of lease to the secured creditor; the ability of the secured creditor to remedy certain breaches; providing the secured creditor with a right of entry to the leased premises to remove any secured property if necessary; and an obligation on the secured creditor to comply with the terms of the lease for any period that the secured creditor is in possession of the leased premises.

Do the terms of the tripartite agreement or lease favour one type of appointment over the other? Will the premises need to be included in any sale or realisation strategy? Does the landlord support the tenants ongoing business (and will it suffer loss to the freehold interest if the business is shut down)?

Dealing with a right of first refusal

some leases provide that the landlord has a first right to take back the leased premises, or buy the business trading at the leased premises, before it can be transferred to a third party. Generally, these clauses require the tenant company to firstly offer terms of sale to the landlord before selling to a third party on better terms. these clauses can complicate the sale process for the insolvency practitioner. sometimes, the landlord may be prepared to agree that it waives that right in relation to the current sale. other times, the landlord is not so obliging. the right of first refusal clause in the lease cannot just be ignored either. if the sale is being conducted by receivers and managers, as mentioned above, they are the agent for the tenant company. to the extent the tenant company is bound by the right of first refusal, the receivers cannot ignore it when conducting the sale as the landlord is able to enforce its rights against the tenant company and stymie the sale. practitioners also need to be mindful of ensuring that any sale to the landlord is consistent with the power of sale obligations imposed on practitioners.4 often the best way to minimise this risk is to conduct the usual marketing and sale campaign but make it known to potential purchasers that the sale is conditional on the landlord not exercising its right of first refusal. the practitioner can then take greater comfort in selling to the landlord once the market has been properly tested.

What is the best form of appointment?

there are many factors that can ultimately determine the best type of appointment to maximise the realisation of a leasehold asset. a detailed discussion of each could fill this article by itself. Generally, the choice is between the secured creditor going into possession, appointing receivers and managers as agent for the tenant company or appointing voluntary administrators to the tenant company pursuant to s 436c of the Corporations Act (2001) (the Corporations Act).2 at a minimum, the following needs to be considered: is receivership or voluntary administration (VA) a default/termination event under the lease? it isn't uncommon to find that va is not listed as a termination event in leases. Would it assist the realisation process to have a moratorium which prevents the landlord from taking back possession of the leased premises? this exists in voluntary administration under s 440D of the corporations act but does not exist for receivership. of course, the moratorium often does not prevent the landlord from terminating the lease, just from retaking possession during the va period. ultimately terms will often need to be reached with the landlord to obtain any long term benefit from a moratorium.3

2 pursuant to that section, the secured creditor must be a chargee over the whole or substantially the whole of the tenant companys assets before it can appoint a voluntary administrator. 3 ASP Holdings Ltd v Pan Australia Shipping Pty Ltd [2006] Fca 1379. 4 For example, s 420a of the corporations act provides that in exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for if, when it is sold, it has a market value not less than that market value or otherwise the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

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Breach versus termination

a recent case has highlighted another issue that practitioners may face when appointed to a leasehold asset.5 in this case, receivers and managers were appointed to a leasehold hotel only to find that the lease was about to expire. luckily, the lease had an option clause that provided: 17 the lessee will have an option to renew its .1 lease of the premises for the option term. 17 the option shall be exercised by the lessee .2 giving the lessor not more than 12 months nor less than 6 months previous notice of exercise of the option. 17 the lessee shall not be entitled to exercise .3 the option unless it has: 17 .3.1 punctually paid the rent; and 17 .3.2 observed and performed the covenants and agreements by and on the part of the lessee expressed or implied in this lease throughout the term except to the extent to which any breach may have been waived or excused by the lessor. the tenant company, through the receivers and managers, sought to exercise the option but the landlord rejected that exercise on the basis that the tenant company was in receivership. the court drew an important distinction between a default and an event which gives rise to a right to terminate, finding that they are not necessarily the same thing. in this case, the court found that the tenant had never agreed that it wouldnt go into external administration so it had not failed to do anything or committed a default which prevented it from exercising the option. the case then went to the court of appeal which affirmed the initial decision.6 While this is a fine point it does highlight an important principle a careful reading of the specific lease involved may yield significant advantages for the secured creditor.

asset to the tenant. a common example is the plant and equipment in use at the premises. this issue can also arise in relation to hotels where the landlord might still own the poker machine entitlements and the tenant merely manages the poker machines for the benefit of the landlord. in other situations essential fitout or even intellectual property might be owned by the landlord making a sale without the landlords cooperation unattainable. the lease, or other document, will often set out what is to happen to those assets in the event the tenant stops occupying the premises and this can have implications for what an insolvency practitioner has to sell. it is important in this case for the practitioner to work out early what the landlords intentions are so the practitioner knows the assets which he or she is able to sell. a related but distinct topic is forfeiture on insolvency type clauses. some leases include terms that provide for the tenant to forfeit certain property to the landlord upon the tenant going into external administration. this can be anything from the fit out through to licenses used at the premises. Fortunately for practitioners, these clauses are problematic from the landlords point of view. the courts have previously held that some clauses that seek to have the tenant forfeit assets upon insolvency are void as against the tenant company 7 on the basis that they confer a preference and advantage on the landlord over other creditors.

Issues when choosing a purchaser

it is important to keep front of mind when selling a leasehold asset that the landlord often has a say in whether it wants your proposed purchaser as a tenant. obviously, the landlord wants someone who will run a successful business from the leased premises and who has the financial means to pay the rent. the lease generally sets out the procedure that the tenant must go through to put forward a potential purchaser for the landlord's approval before the lease can be validly transferred to that purchaser. often, the tenant and the purchaser will sign a sale agreement that is conditional on the landlord agreeing to the transfer of the lease.

Landlords ownership of key business assets

sometimes the landlord might own an asset that is key to the ongoing operation of the business but simply licenses or leases the use of that

5 St George Bank Limited v JB (Northbridge) Pty Ltd [2009] nsWsc 1347 6. JB (Northbridge) Pty Ltd v St George Bank Ltd [2010] nsWca 249. 7 Mosaic Oil NL v . Angari Pty Ltd (no 2) (1990) 20 nsWlr 280.

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Given the importance of obtaining the landlords consent, it is helpful to take early steps to maximise the chances of the landlord consenting to an assignment to the preferred purchaser. some of the steps that can be taken include: meeting with the landlord to discuss its particular requirements; obtaining sufficient information and evidence from potential purchasers during the due diligence and negotiation process in order to be informed about their previous business experience and financial means; and putting a comprehensive submission to the landlord when the time comes. these processes are often delayed because insufficient information is provided to the landlord in the first instance. some leased premises are bound by specific legislation that governs the landlords consent and the transfer of the lease. For example, s 39 of the Retail Leases Act 1994 (nsW) provides that a landlord may only refuse consent to a transfer of the lease where:

the proposed assignee intends to change the use to which the shop is put; the proposed assignee has financial resources or retailing skills that are inferior to those of the proposed assignor; the lessee has not complied with s 41 (procedure for obtaining consent to assignment); or other circumstances set out in s 80e of that act.

Conclusion
this article discusses just some of the more common issues that arise when selling leasehold assets through various forms of external administration. if done well, it is possible to extract significant value from such sales for the benefit of the secured creditor. However, there are a number of pitfalls which, if not considered and managed, can result in a significant part of that value being destroyed to the detriment of all involved.

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