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In the recent Court of Appeal decision of Re Willmott
Forests Ltd [2012] VSC 29, the Court held that a lessee's
leasehold interest can be extinguished by a liquidator appointed to
a lessor company using the disclaimer power in s 568 of the
Corporations Act 2001 (Act).
Facts
Willmott Forests Ltd (WFL) owned and leased
from third parties freehold properties that it then leased to
tenants (growers) under lease agreements. When WFL
went into liquidation the liquidators sought to sell WFL's
interest in the properties. As part of the sales, WFL's
liquidators proposed to disclaim the lease agreements with growers
in order for them to sell the land unencumbered. The liquidators
applied to the court for approval of the disclaimers.
At first instance, the trial judge found that section 568 of the
Act could not be used to extinguish any of the growers'
interest in the land. The liquidators appealed.
Decision: Consequences of Disclaiming Lease
Agreements
The Court considered section 568D of the Act which sets out the
effect of a disclaimer as follows:
to terminate the company's (lessor's) rights,
interests, liabilities and property in the disclaimed property;
and
"another person's property" is only
affected if it is necessary to release the company (lessor) and its
property from liability.
The Court found that WFL had an ongoing liability under the
leases to "provide the lessee with possession and quiet
enjoyment". The Court accepted that by disclaiming the
contract (lease), WFL would no longer have any contractual rights
or liabilities under the contract and would no longer be required
to perform its part of the contractual bargain. The question
therefore became whether it was necessary to extinguish the
growers' interests in the property in order to release WFL from
its liability under the leases.
The Court held that disclaiming the leases would have the effect
of terminating the growers' interests in the leases. The Court
gave the following reasons:
the continuing and prospective obligation to provide possession
and quiet enjoyment is not a fully accrued obligation or liability
that cannot be terminated;
section 568 of the Act is specifically designed to enable a
liquidator to cease performing obligations and to achieve a release
of the company in liquidation from its obligations. The Court
explained, "if WFL is to be relieved of its obligation to
provide quiet enjoyment, clearly and in a context of liability, the
interest of the lessee so far as tenure is concerned is directly
related to and underpins such liability. The tenure must
go"; and
the leasehold interest is governed by the contract of the lease
and the lease itself is therefore governed by the law of contract.
There is no reason why the consequences of a disclaimer of a lease
should be treated any differently to a repudiation accepted by a
non-defaulting party. The Court explained, "in both cases,
the lease agreement is at an end and what follows is a matter of
law, namely termination of the leasehold interest that does not
depend in any way on the reason for such
termination".
Ramifications: the Lessee's Options upon Disclaimer
of a Lease Agreement
The decision is likely to have far reaching consequences for
lessees where a lessor goes into liquidation. There is a real risk
that any lease of property owned by the lessor company will be
disclaimed, and a lessee's interests in property extinguished.
In those circumstances the lessee has the following options:
the Act provides that the lessee can prove as an unsecured
creditor in the winding up of the lessor company for any losses
suffered as a result of the disclaimer;
the Act sets out a process by which a lessee can apply to the
Court to have the disclaimer set aside (section 568B(1) of the
Act). The Court will only set aside a disclaimer if the lessee has
established that the disclaimer would cause it prejudice that is
"grossly out of proportion to the prejudice that setting
aside the disclaimer would cause to the company's
creditors"; and
try to negotiate a new lease with the liquidator.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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