Most Read Contributor in Australia, September 2016
The Victorian Supreme Court has ruled that the ability of a
liquidator of a landlord to disclaim a lease under the
Corporations Act 2001 (Cth) (Act) will
not have the effect of extinguishing the tenant's leasehold
rights over that land.
This has important repercussions for liquidators who are
attempting to wind up landlord companies. Liquidators can not use
the disclaimer power to sell land free of leases thereby increasing
the value of the freehold for the benefit of unsecured
In Willmott Forests Ltd (Receivers and Managers
Appointed)(In Liquidation)  VSC 29, the company in
receivership and liquidation, Willmott Forests Limited
(WFL), is the responsible entity and/or manager of
managed investment schemes. These schemes are forestry operations
conducted on land which is either freehold land owned by WFL or
leased by WFL from third parties. The liquidators entered into sale
contracts for the sale of part of the freehold land, unencumbered
by the rights of the members of the schemes
(Growers) conferred by certain documents including
leases and licences.
The Judge was asked to specifically decide on whether:
...the liquidators are able to disclaim the Grower's
leases with the effect of extinguishing the Growers' leasehold
estate or interest in the subject land?
In concluding that the answer was "no" to that
question, Justice Davies of the Victorian Supreme Court discussed
section 568 of the Act containing the disclaimer power and relevant
Section 568 gives power to liquidators to disclaim certain
property of the company, including a contract for the lease of
land. The purpose behind this is to enable a liquidator to relief
the company of obligations and liabilities which would prevent a
prompt and efficient winding up of the company's affairs. The
effect of the disclaimer on third party rights and liabilities is
to go no further than what is necessary to release the company or
its property from liability.
In citing a UK case (Hindcastle Ltd v Barbara Attenborough
Associates Ltd  AC70) concerning a liquidator of a
tenant, the liquidators submitted that when a lease is disclaimed,
the leasehold estate ceases to exist. However, Justice Davies was
of the view that that did not arise where there is a liquidator of
a landlord (as in the current case) as a lease creates both
contractual and proprietary rights:
A lease is a contract between the parties but a lease is
also the grant by the landlord of an estate in land in the tenant,
which is a different estate in land to the landlord's freehold
estate. The leasehold interest is a legal estate of which the
tenant is the owner.
Justice Davies considered that the reason why a disclaimer of a
lease by a tenant's liquidator on the other hand operates to
determine the tenant's interest in the property is that, in
accordance with section 568D(1), the act of disclaimer terminates
all the tenant's rights, interests, liabilities and property in
respect of the leased property. Therefore, the disclaimer of the
lease under section 568, in this instance, has the consequence that
the land ceases to be subject to the lease.
Conversely, where you have an insolvent landlord and solvent
tenant, the tenant's leasehold interest is the tenant's
property. A disclaimer of the lease by the landlord's
liquidator only terminates the rights, interests, liabilities and
property of the landlord but does not bring the lease or the
tenant's proprietary interest in the land to an end.
Under section 568D however, a disclaimer of the lease by the
landlord's liquidator will nonetheless impact on the rights and
liabilities of the tenant to the extent necessary to release the
company or its property from liability. Therefore, one has to ask:
is the termination of the Growers' leasehold estates necessary
to release WFL or its property from liability? The Supreme Court
was of the view that it is not appropriate to describe a leasehold
estate neither as a liability nor as an encumbrance on the
landlord's property. Rather, a leasehold estate is a grant of
property right and that grant confers on the tenant different legal
rights in the property than the rights attaching to the
landlord's reversionary interest. The Judge therefore opined
that it was unnecessary to terminate the Growers' leasehold
estates in order to release WFL's property from its
As at the time of writing this article, this decision has not
been appealed. It appears that the receivers have carved out the
subject land from the sale contracts. The liquidators'
application concerning the land leased by WFL from a third party is
to be heard by the Supreme Court of Victoria on 27 February
Holding Redlich had provided advice and
represented one the Grower investors in the early stages of this
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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