Are you or your client running a business from leased premises and are in arrears with rent? If so, are you aware that the landlord of a commercial premises is able to change the locks, lock the tenant out of the business premises and proceed to sell the assets located on site to recover rent in arrears?
In South Australia, this process is called ‘distraining for rent’ and is allowed under the Real Property Act 1886 (SA) and the Landlord and Tenant Act 1936 (SA). This process may not be applicable to other States and appropriate legal advice should be obtained in this regard.
There is a process a landlord (or their lawyers) must go through to distrain for rent including:
- issuance of a Warrant of Distraint to the tenant;
- preparation of an inventory of items distrained including serving the tenant with this list and affixing a copy to the front of the premises; and
- selling the tenant’s assets by public auction.
The auction proceeds will firstly be used to pay for all costs incurred in the distraint and sale. Next, the landlord is able to recover any rent outstanding. If there is a surplus, the landlord must then pay this back to the tenant.
Some issues to consider in the distraint process include:
- the landlord is limited to recovering rent only and not outgoings or GST;
- the landlord must be careful not to sell third party owned assets that may be located on site;
- the landlord is not able to distrain for rent if the lease has expired; and
- court proceedings are not required to distrain for rent.
The key take away is that where the lease is in arrears for outstanding rent, be aware that a landlord has a very quick and effective tool available to them to recover that outstanding rent, which could result in the landlord taking possession of the business via the distraint process.
If a company or individual commences a formal insolvency/restructuring process pursuant to the Corporations Act 2001 or the Bankruptcy Act 1966, the landlord is restrained from utilising the distraint process.
Accordingly, should you or your client be seeking to undertake a formal restructuring process and have outstanding rent, it is vital that urgent advice is sought from a Registered Liquidator/Registered Trustee. Once the landlord distrains for unpaid rent there is little that can be done to regain access to the premises other than making payment of the unpaid rent and this may disrupt the ability to complete such a formal restructure.
If you or your client are in the position of not being able to catch up on your rent in arrears, please contact SV Partners for a free and no obligation meeting in order to explore options available to you to stabilise or improve your position in the best way possible.