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Insolvency update: SumoSalad uses insolvency laws to negotiate lease dispute with landlords

After many failed attempts over the past 6 months to negotiate cuts in leasing charges, Luke Baylis, the chief executive and co-founder of SumoSalad put two of its companies, Sumo Westfield Leasing Pty Ltd and Sumo Leasing Pty Ltd, into voluntary administration to force several Westfield centres to the negotiating table. The companies hold the leases over 12 SumoSalad outlets in Westfield shopping centres managed by Scentre Group.  SumoSalad has a total of 104 stores and Baylis says the dispute will not affect the other franchises trading normally.

Baylis says the dispute was triggered by the decision of the shopping centres to dramatically expand the number of food outlets in shopping centres over the past three years.  While foot traffic in shopping centres has only risen approximately 6%, the number of food outlets has tripled or quadrupled, affecting the profitability of SumoSalad stores.

Sumo has been working with landlords over the past few months to negotiate more realistic food court leases for our stores, with no success. Regrettably, landlords have opened the door to more and more food businesses in recent times, as well as opening whole new eating areas within the same precinct, which has essentially cannibalised existing tenants. One shopping centre went from 34 food outlets to 93 in a three-year period. Placing the leasing entities into voluntary administration is the only way to protect our franchisees, and we are confident this will help us restructure our leasing entities in a manner that will create more favourable conditions for our franchisees.”

The Corporations Act 2001 (Cth) specifies when an administrator can be appointed by a board. The board must form the genuine view that the company is insolvent, or likely to become insolvent. Appointing an administrator for an ulterior purpose will render the appointment invalid in the absence of remedial order by a Court.

An inability to renegotiate rent and outgoings to a financially viable level may trigger an administration if it means the lessee company is insolvent or may become insolvent. This is particularly where lease obligations form the most significant financial obligations of an entity. This structure exists often in retail groups which include specific “leasing” entities leasing multiple sites, as with SumoSalad.

The immediate effect of the administration is to provide a moratorium against distress for rent or recovery of possession of the leased premises during the period of the administration: section 440B Corporations Act. This relief is unique to an administration and is often a reason directors choose the appointment of an administrator over other forms of external administration.

The effect is to provide five business days “breathing space” during which the administrator can decide whether to continue occupation or not. After five days, the administrator becomes personally liable for rent unless the company ceases possession or use. The five days gives the administrator time to trade and negotiate terms with the landlord and are essentially “rent free” because the liability becomes a claim in any later winding up but is not personally claimable against the administrators.

Landlords faced with vacancies across multiple sites may be prepared to negotiate arrangements to keep them occupied. Property group, GPT lost 65 separate tenants when 16 of its retailers, including Dick Smith, Payless Shoes, Marcs, Pumpkin Patch, All Phones, Australian Geographic, Laura Ashley, and Pie Face went into liquidation.

Note and Contact Information

This article was prepared by Margaret Miller of Bell Legal Group for general information only and it is not legal advice.

For legal advice about the issues discussed including insolvency and liquidation matters and how these may affect you or your business contact us on 07 5597 3366 or send an email to mmiller@belllegal.com.au

For assistance in relation to commercial and or leasing matters please contact Rob Ffrench by telephone 07 5597 3366 or by email rffrench@belllegal.com.au