Tenants beware — High Court confirms liquidators of landlord companies can disclaim leases
The High Court has recently confirmed that the liquidators of a landlord company are able to disclaim a lease, with the effect of terminating the leasehold interest of the tenant.
The High Court decision of Willmott Growers Group Inc v Willmott Forests Ltd (Receivers and Managers Appointed) (In Liquidation) concerned an appeal to the High Court from the Supreme Court of Victoria on the following points:
- Does s568(1) of the Corporations Act (C’th) 2001 (the Act) empower a liquidator to disclaim a lease which a company has granted to a tenant; and
- If a liquidator has such power, what does s 568D(1) of the Act provide to be the effect of that disclaimer.
In considering the effect of s 568(1) of the Act and the subsequent operation of s 568D(1) of the Act, it was held:
- For the purposes of s 568(1)(f) of the Act, a lease of land by a company is property of the company which can be disclaimed upon liquidation of the company.
- The effect of the disclaimer is to terminate the company’s rights, interests, liabilities and property in or in respect of the disclaimed property.
- In the case of a lease of land, this would have the effect of terminating the tenant’s rights (including the right of quiet enjoyment and the right to non derogation of the grant of exclusive possession) and thus, the tenant’s interests are brought to an end.
- A tenant has the right to prove in the winding up of the company as creditors for whatever damage it incurs as a result of the disclaimer.
Willmott Forests Ltd (WF) was the responsible entity of various managed investment schemes (the MIS) which undertook forestry operations in the nature of tree plantations. The plantations were cultivated by the MIS on land either owned by WF or leased to WF, which was subsequently leased or subleased by WF to the MIS for terms of generally 25 years.
In September 2010, WF went into voluntary administration and its creditors resolved that it be wound up. The liquidators concluded the MIS could not continue to operate as it was highly unlikely a party would take over as responsible entity and manager of the MIS where that party would be required to assume the liabilities of WF. The liquidators sought to sell off WF’s assets, including its freehold land and its interests as lessee of certain land on which plantations were already established. The contracts of sale provided that title would pass to the purchaser, free from encumbrances.
First instance decision
Davies J of the Supreme Court of Victoria found that it was unnecessary to interfere with a lessee’s property rights in order to release a lessor from liability. It was held that whilst a contract for a lease was property capable of being disclaimed by a liquidator, it would not have the effect of distinguishing the lessee’s leasehold estate.
Justice Davies’ decision was overturned on appeal, with the Court finding that a leasehold interest, as governed by a contract of lease, cannot survive the termination of the very contract which created it.
The appellant, Willmott Growers Group Inc (WGG) asserted on behalf of the MIS that a vested interest in land could not be bought to an end by disclaimer of the contract which created that interest.
The effect of a disclaimer (being that from the relevant day, the liquidated company’s interests, rights, liabilities and property in or in respect of that lease are terminated) was not contested by WGG, rather, it was asserted that the termination did not bring the tenant’s rights to an end.
This view was not shared by the majority, which held:
- A lease granted to a tenant by a company is, for the purposes of s 568(1) “property of the company” and specifically falls within the meaning of a contract in s 568(1)(f). This being the case, the effect of a disclaimer under s 568D requires that a tenant’s rights and liabilities are terminated (including the company’s obligation to provide quiet enjoyment and to not derogate from the grant of exclusive possession) in order to release the company and its property from liability from the date the disclaimer takes effect.
- The rights and obligations imposed by a lease which become attached to an interest in land of the lessor and the lessee, “does not detract from the underlying legal character of a lease as a species of contract”.
- A person aggrieved by a disclaimed contract is taken to be a creditor of the company to the extent of any loss suffered and may prove that loss as a debt in the winding up of the company.
In dissent, Keane J concluded that the liquidators’ disclaimers were ineffective without leave of the court pursuant to s 568(1A) of the Act. His honour also concluded that whilst a disclaimer would release WF from its obligation under the leases, it would not be effective to deprive MIS of its right of possession for the remainder of the lease term.
What should you do?
If you are a tenant and you have concerns about the implications of this decision on your lease tenure, please contact us.