Australia: Disclaimer of a lease by a landlord's liquidator does not extinguish tenant's lease

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 creditors.

In Willmott Forests Ltd (Receivers and Managers Appointed)(In Liquidation) [2012] 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:

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 cases.

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 [1997] 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:

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 liability.

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 2012.

Holding Redlich had provided advice and represented one the Grower investors in the early stages of this matter.

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