In brief - How will commercial property perform in 2021? What are the opportunities and risks for sales and leases? How can you avoid zombies and phoenixes? How can commercial agents maximise the opportunities of the post-COVID market?
This conversation is part 1 of a 2-part series with Partner Rhett Oliver. It is an extract from a recent webinar he attended in which these questions were explored.
What has your experience been like in dealing with commercial tenant and ownership disputes during COVID?
Through those initial lock-down periods, our leasing teams worked around the clock acting predominantly for landlords on rent relief requests as well as acting for some larger corporate tenants on rent waivers and relief requests.
We're now coming to the end of some of those negotiations that didn't quite result in an agreement, where they're going through the formal dispute resolution processes that were imposed under the relevant regulations which adopted the Code.
Although insolvencies were down 58% in Q4 2020 compared to 2019, some of the things that have been keeping businesses alive such as JobKeeper, temporary changes to insolvency laws, and the banks' deferrals of loans are ending and we're going to see some fallout coming as of the end of March.
What's the most effective way to terminate a commercial tenancy in this marketplace? Are agents still able to bring in the locksmiths?
There are some recent changes to the insolvency laws, which effectively means that for leases post- July 2018, insolvency as an event of default can't be acted upon. For these leases, the only way that you'd be able to bring in a locksmith is after a normal event of default has occurred under the lease and the appropriate statutory notices have been issued, and those breaches haven't been remedied.
For leases pre-July 2018, in certain circumstances where there has been an insolvency event, the landlord will technically still be able to terminate those leases. Despite this, it's advisable that the appropriate statutory notices have been issued.
What are zombie businesses or phoenix businesses and how much of a risk do they pose?
A "phoenix" company or "phoenix" activities rely upon this concept of corporations having their own legal personality and also having limited liability.
The most common type of phoenix activity is where directors cause the transfer of assets from an insolvent company whilst carrying on a business to the newly incorporated company whose purpose is to operate that same business. The struggling company is usually liquidated not long after the asset transfer, which ultimately results in creditors never being re-paid their debt. Phoenix activity usually involves directors breaching a number of their duties under the Corporations Act, which then potentially results in civil penalties, personal liability of those directors, and criminal liability.
A zombie business is a business or entity that can only meet certain immediate financial obligations and is unable to pay down debt or make other big capital investment requirements for their relevant business.
Many commentators are saying that businesses that are on life support wouldn't be around anymore without initiatives such as the government stimulus or Job Keeper, and the mandated rent relief and rent waivers that came out of the mandatory code of conduct. And also, things like the temporary insolvency laws about extending the periods for non-compliance and bankruptcy. In a way, they are sheltering under these initiatives and it's propping them up.
If you're a landlord or a real estate agent, how do you know if you're dealing with a phoenix or zombie business? What are the signs?
This is one of the big challenges. A zombie conjures up this awful image of some semi-dead person, something that's easy to identify as being problematic. Unfortunately, zombie businesses are far less easy to identify.
Some of the signs to look out for are failures to pay amounts that are due and owing on time, whether it's rent or outgoings under a lease, failures to perform repair maintenance covenants under the lease, or if things are starting to fall into disrepair, or there are drops in turnover where there's turnover rent arrangements in place and financial reporting.
Another red flag for property managers concerning business activities is if there has been a big reduction in employees or they've ceased trading, and a reluctance to provide financial information if requested.
It's also worth keeping an eye on strange tenant behaviour. This may get into some of that phoenix activity where if tenants are asking a landlord to consent to an assignment of a lease to new entities with the same names but different ACNs or where they're asking landlords to consent to financiers taking additional security interests or mortgages over the lease.
In [part 2] of our series, Rhett talks about the fiduciary duties and legal obligations commercial real estate agents have to protect their clients.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2022.