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When your tenant goes broke.

26/06/2013

The Supreme Court of NSW has recently clarified a landlord ‘s rights when a tenant of a commercial property goes broke.  See Padstow Corporation Pty Ltd v Fleming (No 3).

The tenant was a private company. The lease provided that “ If the tenant is insolvent and this lease … is disclaimed … the landlord can recover damages for losses over the entire period of this lease … but must do every reasonable thing to mitigate those losses ..”.  Its directors gave personal guarantees for “  … all the tenant’s obligations (including any obligation to pay rent, outgoings or damages) under this lease …”

On 22 January 2008, liquidators were appointed to the tenant.  They finalised the work in progress. All the stock, plant & equipment were sold. The liquidators paid the rent for a while, but as soon as the premises were cleared out, they disclaimed the lease.  The landlord re-took possession.

The Court ruled that the landlord could continue to recover rent and outgoings up to the date the lease was disclaimed.  After that, the landlord had a claim for damages.  That claim  could include:

1.     Pre-liquidation damages– The court ruled that the cost of legal advice about unpaid rent was recoverable.

2.     Post-liquidation damages– The court allowed recovery of the cost of legal advice about the early termination,  leasing fees for securing a tenant and outgoings incurred that might have otherwise been recovered under the lease.  The Court disallowed a quotation for a marketing campaign for a tenant because it was not an invoice.

3.     Post-liquidation damages for loss of bargain – The net present value of the future shortfall in rent was recoverable . (Although the landlord had mitigated their loss by re-leasing the property at a best available rate, it was less than under the former lease).

4.     Post-liquidation damages for capital loss on sale The landlord claimed both loss of rent from the date of sale until the date the lease was due to end, and also a loss in capital value on sale. The court ruled that was double-dipping.  In the circumstances, the court awarded the diminution in capital value attributable to the lower rent.

5.     No GST on damages – The Court did not add GST to the damages award, because the Tax Office accepts that general damages are not subject to GST.

6.     Interest – The court awarded 12 % pa default interest as agreed in the lease, which was more than usually allowed under the Court’s own rules.

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