Federal Court Grants Commercial Rent Relief to Collapsed Retailer Amid COVID-19 Crisis

Last week, the Federal Court ruled that the Colette brand, under administration, will not have to pay $648,923 owing in rent until the COVID-19 crisis passes. The commercial rent relief decision came after the retailer stood down employees and closed their stores due to coronavirus concerns and government restrictions, making it difficult to return money to creditors.

The court’s ruling is the first of its kind to deal with the commercial rent obligations amidst a ‘difficult and unpredictable environment’.

What is administration?

The Colette brand is currently under administration meaning they are under management of an independent administrator who will investigate and make recommendations on how to proceed with the company. This can include winding up the company, selling the company or restructuring.

A company will generally enter administration when they are insolvent.

How could Colette apply for a rent reduction?

After administrators stood down Colette employees and closed their stores due, they requested a 100 per cent rent reduction from landlords. In response, they were offered just 9 per cent.

Administrators accordingly sought and obtained orders pursuant to s447(1) of the Corporations Act 2001 which grants wide powers to the court to make an order it thinks appropriate in relation to a particular company in administration.

The administrators argued it was appropriate to provide rent relief to them as paying the rent would deplete the company’s cash resources making it difficult to return money to creditors. They also argued it would be difficult to sell the business in the current climate with all eleven interested parties in the acquisition withdrawing their interest by March 25.

Why did the Court find it appropriate to grant commercial rent relief?

The court agreed with the administrator’s argument that it would be difficult to repay creditors and held the order would maximise the chance of the company providing a better return to creditors.

They considered the effect this reduction would have on landlords but ultimately agreed with the administrator’s submissions that it did not unfairly prejudice the landlords. This was because, given the current economic downturn, it is unlikely that they will be able to re-lease the premises for the covered period. Further, any postponing of rent would mean landlords become unsecured creditors for the rental amounts of this amount.

The fact that administrators had previously attempted to negotiate a rent reduction with landlords also was a factor of consideration.

Consequently, the brand’s total rental liability was reduced from $714,827 to $648,923 across 93 stores and 17 landlords for the first fortnight of April.

If you need assistance with insolvency law or a commercial lease, talk to one of our experienced solicitors on (02) 4929 7002, email us or complete an enquiry form.