On Monday, the Federal Court made a ruling that collapsed fashion retailer Colette by Colette Hayman will not need to pay $648,923 owing in rent due to the extraordinary position it finds itself in.
Colette administrators Deloitte initially requested a 100 per cent rent reduction from landlords, and were offered 9 per cent.
The administrators argued to the court that due to the extraordinary position they find themselves in, they should not be personally liable for ongoing rent, and not pay any rent, as doing so would deplete Colette Group’s resources and limit the benefit from a future sale as a going concern.
According to Judge Markovic, Deloitte is right and will not pay rent on 93 Colette stores due between April 1 and 14.
“The administrators find themselves operating the Colette Group in an ever-changing environment brought about entirely by external factors,” Judge Markovic said.
“They need to be agile and able to react to the interests of stakeholders. One of these groups is of course the creditors of the Colette Group.
“When this application was viewed in that light, it was clear to me that making the orders sought [were] in the interests of the creditors of the Colette Group as a whole.”
However, the judgment raises questions about what is considered an ‘extraordinary’ circumstance in the current retail environment – with many retailers seeing the same conditions and difficulties as Colette Group.
According to Stephen Spring, chief executive of Australian Retail Lease Management, this judgment could be a disaster for landlords.
“The decision sheds some light on the way the courts may interpret lease and rent liability generally in the COVID-19 pandemic,” Spring told Inside Retail.
“Whilst there have been temporary changes to director’s liabilities under insolvent trading laws as a result of the COVID-19 pandemic, many directors of companies that lease retail spaces are in the same invidious position.”
And with the decision now handed down, Spring is interested to see how it will affect businesses seeking rent reductions in future – especially those that have not appointed administrators.
According to Spring, many centre managers are asking small and medium businesses for extremely detailed financial information as to cash, assets and liabilities – despite landlords already knowing turnover figures that readily show the extent of the downturn.
The issue is further complicated by the federal government’s commercial rent solution addressing a portion of rents payable equal to the percentage of a business’s revenue lost.
Many businesses have seen upwards of 70 per cent of their revenue vanish, with physical spaces closing by government decree or in the interest of public health, and online sales only able to recoup so much of lost earnings.
The matter will be back in court on Wednesday, April 15.
This article was first published by Inside Retail.