02 September 2020
Commercial landlords are exposed to a range of risks from the economic and social consequences of the COVID-19 pandemic. One new risk to be confronted will come from the increased prevalence of rental deferrals and interaction with the Australian insolvency regime over ‘unfair preferences’.
Under the Australian insolvency regime, an unsecured creditor of a company in liquidation may be forced to return payments received from that company in the preceding six months.
In normal trading conditions, rent paid to a landlord of commercial tenancies is not considered to be subject to this risk. There are two primary reasons for this:
The current trading conditions are far from normal.
There is an increased likelihood of landlords receiving payment for rent in arrears – whether under a formal standstill arrangement or, simply, late payment. Payment of rent in arrears would very likely be a payment under a ‘debtor/creditor’ relationship, meaning that the protection for payment in advance would not be available.
There may also be a very real question as to what the value is to the tenant of securing the ongoing operation of the lease. This would need to be assessed on a lease specific basis, but the impact of physical distancing requirements and the current stage 4 restrictions in Victoria could mean that the true value of securing a lease is reduced – potentially to an amount below the rental arrears required to be paid.
For example, a large retail chain could still be deriving a profit from its head office building and any distribution centres which are processing online orders, but may be deriving limited benefit from stores which are shut or have drastically reduced customers.
If the rental arrears on those stores went back to the time that restrictions were first imposed in March 2020, consideration would need to be given to the value of the leases for those stores to the tenant into the future. That consideration would be informed by factors such as the duration of the lease and the time that the restrictions are ultimately relaxed – the latter of which is far from certain.
Another ‘defence’ that would normally be available to a landlord (or any other creditor) to resist an unfair preference claim would be showing that the landlord received payments in good faith and had no reasonable grounds for suspecting that the company was insolvent or at risk of being insolvent at the time the payments were made.
This is an objective process and does not require the creditor to have actual knowledge that the company was insolvent at the time of making the payment, simply that they had knowledge of indicators of insolvency. However, it may be increasingly difficult for landlords to rely on that defence given:
The interaction of the payment of rental arrears in response to the pandemic and the insolvency regime remains unknown. But, landlords receiving payment for rental arrears should be aware of their potential exposure to unfair preferences. Depending on the circumstances, it may be that landlords are incentivised to actively assist the recovery or restructuring of the tenant’s business to avoid the risk of insolvency altogether.
This publication is part of our insight series COVID-19: Navigating the implications for business in Australia and beyond. To get notified by email when new COVID-19 insights are released, please subscribe for updates here.
 Beveridge v Whitton (as liquidator of HSBB PtyLtd (in liq))  NSWCA 6 at .
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