(Excerpted from “Retail Bankruptcies – Protections for Landlords,” Practical Law Journal, May 2018, by Lars Fuller)

Due to increasing competition from online sellers, recent years have seen a dramatic uptick in Chapter 11 bankruptcy filings by multistate brick-and-mortar retailers – some that have dozens, or even hundreds, of storefronts. These bankruptcies create challenges for the commercial landlords that own the shopping centers, malls and other establishments that those retailers rented.

Ground leases are fairly common but sometimes overlooked property interests. A succinct but adequate definition of a ground lease was articulated by Herbert Thorndike Tiffany (Tiffany on Real Property § 85.50 [3d ed.]) as follows:

The new ipso facto regime applies to all contracts to be entered into on or after 1 July 2018. Businesses should now be carefully reviewing the effect of that regime on their contracts and whether any of their contracts may be exempt under the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 published on 24 June 2018.

The types of contracts excluded from the new ipso facto stay

The Supreme Court held that a statement about a single asset can be a “statement respecting the debtor’s financial condition” for purposes of determining the application of the exception to discharge set forth in Section 523(a)(2) of the Bankruptcy Code. Lamar, Archer & Cofrin LLP v. Appling, 2018 WL 2465174 (June 4, 2018).

The Supreme Court’s recent decision in Merit Mgmt. Group, LP v. FTI Consulting, Inc., 138 S.Ct. 883 (2018), held that transfers made by and to entities that are not “financial institutions” or other covered entities fall outside of the scope of the § 546(e) safe harbor even if they are made through financial institutions or other covered entities. The Supreme Court’s decision resolves a circuit split over how the § 546(e) safe harbor applies to transactions involving conduit entities and could impact future disputes involving safe harbors under the Bankruptcy Code.

The Supreme Court’s recent decision in Merit Management Group, LP v. FTI Consulting, Inc., 138 S.Ct. 883 (2018), held that transfers made by or to entities that are not “financial institutions” or other covered entities fall outside the scope of 11 U.S.C. § 546(e)’s “safe harbor” from a trustee’s avoidance powers under the Bankruptcy Code, even if those transfers are made through financial institutions or other covered entities.

The restructuring, distressed and debt market in Australia continues to evolve. We have a competitive debt market that constantly seeks out that next transaction. We have an environment of innovation with restructuring professionals seeking to push the boundaries of what may be possible within the current legislative framework, and we have changes to that framework with the introduction of Safe Harbour as a defence to insolvent trading and ipso facto reform which seeks to lock in contracts post-insolvency.

An important part of last year's package of amendments to the Corporations Act 2001 (Cth) were the ipso facto reforms which will stay the exercise of certain contractual rights relating to a counterparty's insolvency or financial position. What, if any, contracts would be exempt from the stay has been a major question, not least for the construction industry.

This has now been answered, with the release of exposure drafts for public comment by May 11 2018 of the:

A recent NSW Supreme Court decision has decided that an insolvent contractor can claim under Security of Payment legislation, rejecting Victorian Court of Appeal precedent as "plainly wrong". It might have significant ramifications for participants in the building and construction industry across Australia.

In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412, the NSW Supreme Court considered the extent to which Security of Payment (SOP) legislation can be relied upon by an insolvent contractor.

Stakeholders have until 11 May 2018 to comment on a key part of the new ipso facto regime – the exceptions to the statutory stay on ipso facto clauses in certain categories of contracts and rights.

The new insolvency legislation commencing 1 July 2018 (Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017) introduces a statutory stay on the exercise of contractual rights arising by reason of certain insolvency trigger events.