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Practical issues for
Controllers when dealing
with occupied premises
Introduction
The rising number of insolvency practitioners
being appointed specifically over real property
assets, or over companies whose primary
business is property development/management
means practitioners are dealing with an increasing
volume of issues involving tenants and other
occupiers of property.
More often than not, a pragmatic approach
is required to maximise the outcome for the
stakeholders, particularly the mortgagee whose
interests the appointee has been entrusted to
protect, notwithstanding that the appointee may
have a range of legal and contractual options at
their disposal.
This article looks at a number of the situations
insolvency practitioners appointed over property
assets may face, and the possible approaches the
practitioner might take to deal with them.1
The state of the market for
appointments over property
Anecdotal evidence shows that in recent years
there has been a growing number of Controllers
and Managing Controllers (ie, Agents for the
Mortgagee in Possession, Receivers under real
property mortgages, and Receivers and Managers
of corporations) appointed over properties,
property portfolios and property-related
businesses.
This increase in activity has been attributed to
a variety of causes, however, a common factor
underlying many insolvency appointments has
been unacceptably high ‘loan to value ratios’ (LVR)
as a result of depreciating real property values. In
addition, borrowers have been unable to service
high levels of debt as cash flows dry up due to
an inability to get developments / sub-divisions to
an appropriate stage of completion for secondary
sales. This situation has become somewhat of a
vicious cycle, as many developers believe they
can increase borrowings to implement their
development strategies, however their financier
shows no appetite to accede to such proposals
due to increasing LVRs.
As noted above, it may have been some time
since practitioners have been faced with as many
purely property-related appointments. Examples
of issues involving the occupation of mortgaged
property, which is often continuing at the time of
appointment, include:
w taking possession of the property;
w unauthorised tenants or residents
(ie, occupation with no formal lease or tenancy
agreement);
w letting or sub-letting of the property where the
mortgagee has no notice or has not consented
to the lease/sub-lease;
w residential occupants of commercial buildings;
w directors or related parties in residence or
occupation of mortgaged property; and
w business operations being conducted from the
mortgaged property.
The issue for the practitioner is what to do
about the occupying party now that he or she
is personally responsible for the maintenance
of the property and setting the strategy to
maximise its realisable value. In many of
the examples above, the preferred option is
usually to evict the unauthorised or unwanted
occupier as soon as possible. This facilitates
a more orderly presentation of the property
to prospective purchasers and is generally
preferred by the agents engaged to manage the
sale. However, immediate eviction is not always
possible, or practical, so alternate solutions may
need to be found.
Michael Fung
Partner,
PwC Australia
Melissa Humann
Director,
PwC Australia
1 We have not sought to provide any specific analysis of relevant State based legislation that will apply. Rather, we have sought to consider some of the
practical ways that problems might be dealt with as they arise. Any Controller needs to be particularly cognisant of the overriding obligations under the
Corporations Act 2001 (Cth), in particular, s 420A.
feature

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Feature Article I Practical issues for Controllers when dealing with occupied premises > 2
Pragmatic solutions required
Guidance on how to deal with a number of
the situations that arise can be difficult to find.
The Corporations Act 2001 (Cth), in particular
Part 5.2 of Chapter 5 ‘Receivers, and other
controllers, of property of corporations’, does
not provide specific guidance on how to deal
with occupiers of real property coming under the
control of a Controller. Appointees are left to rely
on a combination of State-based property acts,
common law, and commercial pragmatism to
formulate their strategies.
An appointee needs to be mindful of various
State legislation that applies to commercial and
residential leasing of property, sale of property
and regulated industries such as gaming and
licensed premises. In particular, residential
tenancy legislation governing the rights of
tenants needs to be considered even when a
formal lease agreement is not in place. These
will often prescribe minimum notice periods for
the eviction of residential tenants (subject to the
reason for the eviction, note the highly regulated
procedures in Queensland for example). While
these notice periods are generally not long
enough to disrupt a standard sales campaign, an
appointee needs to be aware of them in advance
so that appropriate planning can be undertaken.
Often, however, the statutory framework will
need to be considered in the context of common
law principles. For example, an aggrieved tenant
otherwise in default in the payment of rent might
bring a claim for relief from forfeiture under
common law and equitable principles.
In a stagnant property market where equity
might quickly diminish, the existence of the
myriad stakeholder interests and their respective
legal rights means that a Controller needs to
quickly determine what strategy is most likely to
deliver the optimal outcome for their appointor.
That strategy might see a commercial and
pragmatic solution as being that which promises
the greatest return to the secured lender.
Below are some examples where occupiers need
to be dealt with by an appointee.
Taking possession of property
A secured creditor wishing to take possession of
mortgaged property might do so in one of several
ways. If tenanted, and the mortgagee has notice
of and/or consented to the lease, then typically
the mortgagee would take possession by issuing
a redirection of rent notice. If the property is
vacant land or unoccupied, the physical action
of asserting possession by the changing of locks
or posting of notice may suffice. If the property
is occupied by a hostile occupier, be they the
owner or not, the institution of court proceedings
for possession may have to be undertaken.
A similar range of options is available to the
appointed Controller who effectively steps into
the shoes of the mortgagee to execute such
actions. (Note that where the appointment is in
the form of a Managing Controller over the land
owning entity, this may circumvent the need for
possession proceedings.)
One of the first issues the Controller must
confront is how they should secure control or
possession of the relevant property.
For tenanted property, as noted above, the
Controller would issue a rent redirection notice
in the first instance. In most cases, this is a
relatively simple transition with the tenant
having to make minimal adjustments to their
arrangements other than paying rent to a
different bank account.
For unoccupied property, physical possession
needs to be obtained. In some cases, the
mortgagor/director of the insolvent company will
cooperate and simply hand over the keys, but
otherwise the appointee may need to take extra
steps such as changing the locks, chaining gates,
erecting fences, etc.
These of course are simplistic scenarios. From
a practical perspective, there are a number of
situations that could arise, for example:
w Whilst a formal lease may exist over a property,
if the mortgagee has not consented to the
lease, issuing rent redirection notices could
be construed as giving consent. This may not
be a desirable outcome, particularly where
the preferred realisation strategy is to sell
with vacant possession. In such a situation,
alternatives such as agreeing to a ‘licence
to occupy’ may be appropriate, subject to
the type of tenancy (ie, commercial versus
residential).
w For residential property in particular, it is easier
to deal with the managing agents rather than
the tenants directly and hence preferable to
send rent redirection notices to the agent. Few
people deal with ‘receivers’ and ‘agents for
the mortgagee’ on a day to day basis, so what
might seem like a straightforward situation
to an insolvency practitioner, could be quite
a confronting and unnecessarily worrisome
situation for the tenant.

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w Changing the locks on a vacant property
is (relatively) easy. However, ‘changing
the locks’ might involve more than what
is implied by that expression. It is not
uncommon to see squatters and/or other
trespassers occupying vacant properties,
and in such cases more stringent measures
may be required to secure the land (ie, legal
proceedings). Leaving aside the time and cost
of a court application, the appointee will need
to consider:
– The physical safety of the Controller’s staff
and / or tradesmen engaged to deal with
security matters at the property, and
– The reputational risk of the appointor who
could be portrayed as taking excessive and
aggressive steps to exercise their security
(albeit entirely legitimate actions that are
within their legal rights).
Dealing with unauthorised tenants
It is common to find tenants in occupation that
are either unknown to the mortgagee, or do
not have the mortgagee’s consent.2
In such
circumstances, the existence of these tenants
can negatively impact the potential value of
the property, due to their treatment of the
property, or simply because the property may
have greater value if marketed with vacant
possession. An issue confronting an appointee
is how difficult it will be to evict the tenant, and
the flow-on impact of the delay in marketing
and selling the property. The worst‑case
scenario for a Controller is to have sold the
property with vacant possession only to find
at settlement the tenant or occupier remains
in situ. In circumstances of a declining property
market, a purchaser with cold feet might take
advantage of this situation and look to avoid
settling on the basis of the failure to deliver
vacant possession.
However, other factors must also be
contemplated. While having a tenant in
occupation can have implications for insurance,
equally, if the premises is uninhabitable or has
other occupational health and safety concerns,
evicting the tenant/occupier may be the only
option available.
Conversely, the tenants may be acceptable, and
may enhance the value of the property in a sale.
If they are not subject to a lease contract, a lease
will therefore need to be negotiated. The advice
of real estate agents appointed to manage the
sale will usually inform an appointee of the most
appropriate course of action.
Regardless of the decision reached, early action
and resolution is critical to allow sufficient time
to prepare the property for sale. Instinctively,
evicting unauthorised tenants as soon as
possible will appear to be the first task of the
appointee. However, this may not be possible,
and sometimes may not maximise the value
of the property. Should a tenant be permitted
to remain in possession up to settlement, the
Controller should ensure the sale of land contract
allows a unilateral extension of the settlement
date to facilitate delivering vacant possession in
the event of default.
Residential occupancy of
commercial buildings
An uncommon occurrence, but one which has
been encountered, involves persons residing in a
purpose-built, semi-permanent residence within
a commercial building. If no formal lease is in
place, the person is likely to be occupying the
premises under an informal agreement with the
mortgagor.
The considerations for the appointee in these
circumstances included:
w the person’s rights (if any) under the applicable
residential tenancy legislation, and how these
rights may impact the realisation strategy and
timeframe;
w the occupational health and safety issues
surrounding the quality of the dwelling, as
well as the obligations of the appointee to the
resident;
w the cost benefit of dismantling the dwelling;
w whether the occupation by this person
increases insurance premiums (or potentially
reduces premiums due to the site being
occupied as opposed to vacant), or is even
permitted under the insurance policies; and
2 A sale of land by the mortgagee or its agent will operate to extinguish the interest of a lessee upon settlement unless the mortgagee had consented in writing to
such lease see ss 66 and 77(4) of the Transfer of Land Act 1958 (Vic).

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Feature Article I Practical issues for Controllers when dealing with occupied premises > 4
w giving due empathy to the person
being evicted from their home.
In the instance encountered, the
occupational health and safety risks
and delay to the sale process far
outweighed any insurance premium
benefit of having the property
occupied. It was also difficult to
identify any practical advantages in
allowing the occupancy to continue.
Notwithstanding, empathy to the
resident’s situation was required,
having regard to the reputation of the
chargeholder. A compromise was able
to be reached, whereby sufficient
time was given for the person to
find alternate accommodation. That
the resident also had a pre-existing
relationship with the mortgagor, and
the mortgagor’s cooperation was still
required in dealing with other properties
under the appointee’s control, also
contributed to the manner in which the
eviction was handled.
Directors or related parties
in occupation, especially in
residential properties
Often the borrower, or for corporate
appointments, the director of the
insolvent mortgagor company and
their family, will reside in one of the
properties that the appointee controls.
Immediate eviction (often desirable
for the efficiency of the sales process)
risks hostility from the directors and
does not help gain their cooperation,
notwithstanding their legal obligations
to assist the Controller. A lack of
cooperation has implications for
the effective management of the
appointment, and is likely to add time
and cost to the realisation of this and
other assets.
Although inconvenient for realising the
property in question, a practical solution
is often to defer the sale of the property.
In the interim, the Controller may
request the borrower/director to meet
basic costs relating to the property such
as rates and taxes and applicable utility
charges. Caution, though, ought to be
exercised. It is not often you would see
evidence of a formal lease between the
director and land owner, and even rarer
to see a mortgagee consent to such
lease. Given the lender can, in such
circumstances, sell free and clear of any
claim the borrower/director may have
as ‘tenant’, it would be prudent to avoid
formalising any tenancy that might
subsequently bind the mortgagee. In
any case, unpaid statutory charges are
usually dealt with at the settlement of
the sale of the property and therefore
do not necessarily warrant a large
investment in time by the appointee
to recover them from the borrower/
director in the lead up to a sale.
Where the appointment covers a
number of mortgaged properties, it
could be worth considering selling the
director’s residence last. This lessens
the stress of the appointment on the
director, and potentially allows the

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secured creditor’s debt to be settled out of the
proceeds of the other properties in the portfolio.
Even if the director’s residence may be the
most marketable, this practical approach may be
beneficial to the overall smooth running of the
appointment. Understandably, the value of the
property in question may be of such materiality
that any deferral in the sale, however beneficial
to the director and obtaining his/her cooperation,
simply cannot be recommended. Each case
needs to be treated on its merits.
Businesses operations being carried
out from the mortgaged property
Appointees are unlikely to have prior knowledge
of all activities being carried out on mortgaged
property prior to their appointment. The advent
of a business being carried out on the property
by a related party or third party presents
complications, but in the absence of a lease or
mortgagee consent to a lease, can generally
be treated in the same way as an unauthorised
tenant. While evicting residential or retail tenants
is highly regulated, evicting a commercial tenant
can be less onerous, although ultimately it may
require court proceedings for possession.
The type of appointment will also have a
bearing on the way the appointee handles
the situation. For a Managing Controller, the
appointment typically covers all the assets and
undertakings of the subject entity. Therefore,
plant and equipment and other types of chattel
assets could be included as part of the sale of
the property where their likely net realisable
value on a ‘stand-alone’ basis is not going to
materially add to the receivership recoveries (for
example, if you are selling a restaurant, inclusion
of basic kitchen equipment, tables and chairs,
linen, glassware, etc.). This position is less clear
when the appointment is as a Controller over
a real property asset. In this scenario, it is the
debtor who may need to be pragmatic and ask
themselves whether the property (given its
inevitable sale) would be more attractive to a
purchaser if chattel assets are included as part of
the deal.
The physical impact of the business activities on
the property needs to be taken into consideration
– as does the impact of the activities on the
saleability of the property. In some instances,
the presence of the operations may enhance the
saleability of the property. For example, if the
business owner is willing to enter into a formal
lease for the premises, this locks in an income
stream which could make the property more
attractive to potential purchasers. (Refer to earlier
comments in this article).
The agent handling the sale will usually advise
on the commercial attractiveness of the various
options available and give an opinion on the
approach that will most benefit the marketing of
the property and ultimately, the amount realised
in a sale.
Conclusion
The increased number of appointments over
real property has resulted in a range of issues
confronting appointees that they may not be
immediately familiar with. There is limited
guidance from the Corporations Act on how to
deal with these issues.
In particular, properties may be occupied on
appointment, with the appointee’s first instinct
often being to swiftly remove the occupants in
order to ready the property for sale with vacant
possession.
However, in practical terms, it may not be
possible to remove the occupiers without
considerable time, expense and angst. The
reputation of the chargeholder and dignity of
occupants should also be considered. There are
also legal restrictions contained in legislation
other than the Corporations Act that govern an
appointee’s actions.
In this context, and given the variety of different
circumstances that may present themselves,
there is no set formula for solving these issues.
An appointee needs to be mindful of all of the
above, but pragmatism may be the insolvency
practitioner’s best tool.
Acknowledgement:The authors are
grateful for the contribution made by Michael
Lhuede, Partner, Piper Alderman Melbourne in
reviewing and commenting on this article.
When dealing with occupied mortgaged
property, more often than not, a pragmatic
approach is required to maximise the
outcome for stakeholders, notwithstanding
the range of legal and contractual options
available to the practitioner to deal with
the situation at hand.