Both retail and commercial leases often contain a clause which provides for what is to happen if a tenant abandons its property in the premises. The clause usually provides that the landlord is deemed to take beneficial ownership of the property after a stipulated period of notice is given, and the tenant fails to remove its property from the premises within the specified time.

A recent decision provides greater understanding of how these contractual provisions work in circumstances where a liquidator is appointed to the tenant company, and where the provisions of the PPSA might come into play.

It is extremely important that landlords are able to deal with property of the tenant which has been abandoned at the end of the lease. Contractual provisions in a lease imposing an obligation to remove property at the end of the lease and in circumstances of tenant default, giving rights to the landlord over the tenant's personal property, may create security interests under the Personal Property Securities Act 2009 (Cth) (PPSA) requiring perfection, by registration under the PPSA. The commercial need and benefits of doing so will depend on the likely value of the property in question.

Landlords should be careful to seek the consent of the administrator or liquidator before exercising their contractual right under a provision in the lease pursuant to which they obtain title to any or all of the tenant's abandoned goods.

The landlord must also be cautious and consider whether any of the tenant's property or equipment may be owned by a third party, possibly pursuant to the terms of a hire purchase agreement. The landlord should undertake a search of the Personal Property Securities Register (PPSR) to determine whether any equipment left in the premises, including where serial numbers can be identified on the equipment (such as, ovens and refrigerators), is possibly owned by a third party.

The background

In Bellaire Pty Ltd v Roselink Enterprises Pty Ltd as trustee for The Ice Nemesis Unit Trust [No 2] [2020] WASC 390, the Supreme Court of Western Australia was asked to determine two legal arguments put by the tenant's Liquidators challenging the abandoned goods clause in the lease. The Court's reasons were published on 29 October 2020. The reasons for decision provide important guidance where a dispute arises in circumstances where the tenant enters into a Court ordered liquidation. Similar considerations may apply in the scenario where the tenant enters into voluntary administration which can lead to a liquidation following a creditor vote, without a Court order.

The dispute between the landlord and the tenant's Liquidators concerned the ownership of the fittings and stock in trade left in the leased premises at the time the lease was terminated. The landlord's position was that these items were no longer property of the tenant. The Liquidators disagreed and contended they still fell within the pool of assets available for the benefit of the general body of the tenant's creditors.

The lease was due to expire on 24 May 2020. Prior to this, on 21 April 2020, Liquidators were appointed to the tenant company by order of the Court. On 20 May 2020, the Liquidators issued a formal notice of disclaimer of the lease in accordance with section 568 of the Corporations Act 2001 (Cth) (Act). As at 20 May 2020, the Liquidators had not removed any of the tenant's fixtures or stock in trade from the premises. In accordance with section 568C(3) of the Act the disclaimer and termination of the lease took effect from the next day, on 21 May 2020, that is, before the lease expired.

The central lease provision was clause 7.3(a), which provided as follows:

7.3 Abandoned Goods

(a) Any Tenant's Fixtures, Tenant's fittings or stock in trade not removed by the Tenant as required by this clause shall be deemed abandoned by the Tenant and shall be or become the property of the Landlord. The Landlord may invoice the Tenant, and the Tenant must pay, for the cost of removal of any Tenant's Fixtures, Tenant's fittings or stock which have been abandoned by the Tenant.

Importantly the reference to "this clause", was a reference to the earlier clauses 7.1 and 7.2, which dealt respectively with the tenant's obligation, upon surrender, following expiration or the sooner determination of the lease, to make good the premises.

The arguments

There were two arguments presented by the Liquidators in relation to clause 7.3.

The first argument was that this clause gave rise to a "security interest" within the meaning of section 12 of the PPSA. The landlord had not perfected its security interest by registration under the PPSA, and so the security interest vested in the tenant, upon its liquidation under section 267 of the PPSA. This argument was rejected by the Court, because clause 7.3 did not secure the performance by the tenant of its obligations to make good the premises on termination of the lease, which were set out in clauses 7.1 and 7.2. This aspect of the decision is equally helpful had the landlord been dealing with a voluntary administrator, because unperfected security interests also vest in the company following the appointment of a voluntary administrator under section 267 of the PPSA.

The second argument concerned section 468 of the Act, which makes void any disposition of a company's property which occurs after the commencement of its winding up by the Court, unless, among other things, the Court makes a different order vesting the property in someone else. Other exemptions include dispositions which are made by the liquidator, or dispositions which are made in good faith by or with the consent of a voluntary administrator or made under a deed of company arrangement.

For the purposes of the Act, the tenant's winding up commenced when the Court made the relevant order, on 21 April 2020. The disclaimer took effect on and from 21 May 2020, which was before the lease was to expire on 24 May 2020.

The decision

The Liquidators submitted that if clause 7.3(a) operated as the landlord contended then there was a disposition of the tenant's property as at the date of the disclaimer, and that deemed abandonment would be a disposition. The Court accepted that clause 7.3(a) could only operate from the date of the notice of disclaimer, and therefore agreed that the disposition to the landlord under clause 7.3(a) was void under section 468(1) of the Act, because it was made after the commencement of the winding up by the Court.

The Court also accepted the Liquidators' argument that as at the date of the tenant's winding up, the tenant no longer had control of its stock, fixtures and fittings as control passed to the liquidator, and as such, section 474 of the Act operated to make the abandonment of goods ineffective as there were no goods controlled by the tenant which could have been abandoned.

Conclusion

The Court's findings in the decision regarding the creation of PPSA security interests are consistent with Jayfield Pty Ltd v Cussen [2020] VSC 380, where the Court held that the landlord's right under a lease to deal with abandoned goods did not give rise to a PPSA security interest. The decision in Jayfield does, however, highlight that obtaining an order under the Uncollected Goods Act 1995 (NSW) (or equivalent legislation in other jurisdictions), could potentially avoid any debate about whether a contractual right to deal with a former tenant's personal property amounts to a registrable PPSA security interest.

Key takeaways for landlords

• Abandoned goods clauses need to contemplate and deal with circumstances in which a liquidator is appointed and the lease is disclaimed. In Bellaire, clause 7.3(a) was to be read with earlier clauses dealing with the tenant's obligations upon lease surrender, expiration of the lease, or the sooner determination of the lease, and make good, which were not relevant to the scenario in which the lease is formally disclaimed by a liquidator.
• An appropriately drafted lease will ensure that the landlord's rights in respect of abandoned goods left on the premises upon termination arise independently of the tenant's obligations to vacate and make good the premises, and provide that the tenant grants a PPSA security interest in favour of the landlord to secure the tenant's obligations under the lease including where the tenant abandons its personal property (which the landlord then perfects by registration on the PPSR).
• Registration on the PPSR is particularly important in relation to expensive tenant's property, either paid for by the tenant or funded by the landlord, that are not fixtures but are essential for the ongoing use of the premises even after the tenant vacates (for example, in hotel leases where major works have been done).
• It is important for landlords to understand when any Court ordered liquidation is deemed to commence. As occurred here, the general rule is that it commences from when the Court order is made, but it can be deemed to commence at an earlier date, by reason of a previous administration or deed of company arrangement. Often the position is less than clear, because the commencement of winding up proceedings may not be apparent, because they will be stayed by the administration, so specialist advice should be sought.

Additional considerations for landlords

While not addressed in the case, the same result will very likely follow where the lease is terminated after the appointment of a voluntary administrator, as opposed to a liquidator:

• If the voluntary administrator gives a written notice to the landlord that they no longer wish to exercise any rights in relation to the property, the landlord may elect to terminate the lease in accordance with its terms, that is, the landlord may elect to exercise its right to terminate the lease by reason of unremedied breach, such as, a failure to make payments as and when they fall due under the lease. In this scenario, the termination occurs in accordance with the lease terms.
• However, in the case of abandoned goods, section 437D of the Act, has much the same effect as section 468, and renders void any "transaction or dealing affecting property of the company", unless it is undertaken by or with the consent of the voluntary administrator, or by order of the Court.
• Given this provision, and the exceptions to section 468 of the Act considered earlier, landlords should seek the consent of the voluntary administrator, or if this consent cannot be obtained, seek a Court order, before exercising any contractual rights they may have in relation to abandoned goods.
• Disclaimer in liquidation goes far beyond what has loosely come to be known as disclaimer in voluntary administration, or by a receiver, in which a notice is given that the voluntary administrator or receiver no longer wishes to exercise any rights in relation to the property, and thereby avoids personal liability for rent and other money payable under the lease (section 443B (for voluntary administrators) and section 419A (for receivers) of the Act). Disclaimer in liquidation has the more significant effect of terminating all of the company's rights and interests in the lease, so far as is necessary in order to release the company and its property from that liability (section 568D of the Act). Where a lease is notionally disclaimed by a voluntary administrator or receiver the landlord should still follow the contractual process to terminate the lease.

This is a complex area and one that is extremely important for landlords to understand. If you would like to learn more about how this decision might impact you and how to ensure your interests are protected, contact one of our specialist team today.