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The recent decision of the Victorian Court of Appeal, In the
Matter of Willmott Forests Ltd (in Liquidation) [2012] VSCA
202, has confirmed that a liquidator of a landlord can disclaim a
lease so as to terminate a lease in certain circumstances.
Case background
Willmott Forests Limited (landlord) leased land to certain
tenants who had the right to grow and harvest trees on the
land.
Liquidators were appointed to the landlord and the liquidators
subsequently entered into contracts for the sale of the land,
essentially with vacant possession – ie without leases. In
order to be able to give vacant possession of the land the
liquidators needed to have the leases terminated or extinguished.
Accordingly, the liquidators sought a determination from the Court
as to whether the liquidators were able to disclaim the
tenants' leases with the effect of extinguishing the
tenants' leasehold estate or interest in the subject
land.
The Court of Appeal held that not only would a disclaimer of a
lease agreement extinguish the contractual rights but it would also
extinguish the proprietary (or leasehold) interest of the
tenants.
Reasoning of the Court of Appeal
The Court of Appeal sighted three main reasons for its
decision:
a disclaimer cannot terminate obligations which accrue in the
past, however, a landlord's obligation to provide possession
and quiet enjoyment to a tenant is an ongoing and continuing
liability and as such can be terminated by a disclaimer
leases are essentially a form of contact and therefore a
leasehold interest cannot survive the termination of the lease
contract itself and
the legislative intention of section 568 of the Corporations
Act is to enable liquidators to release the company in liquidation
from obligations which would prevent the prompt and effective
winding up of the affairs of the company and this would extend,
where necessary, to the "intrusion into the property rights of
an innocent third party".
Setting Aside Disclaimer
The Court acknowledged that a disclaimer may affect third party
rights and interests (such as those of a tenant) including the
"most innocent of parties" but noted that the
Corporations Act did provide for an aggrieved party with a right to
making a claim as a creditor and prove its loss as a debt in the
winding up of the liquidated company. It was further noted however
that an aggrieved party also has a right to seek to set aside a
disclaimer by the liquidator under the Corporations Act. To do so
it must be establish that the prejudice suffered by the aggrieved
party would be grossly out of proportion to the prejudice suffered
by the company's creditors in not permitting the
disclaimer.
So, we query whether it would be justifiable for a liquidator of
a landlord to disclaim a lease on the following basis:
the lease contains financial obligations on the landlord which
cannot be recovered or offset against the rental income of the
property - this might be the case of a charitable not-for profit
retirement village
the lease renders the freehold interest unsaleable – this
might be a special-purpose designed property
the lease is on 'tenant-friendly' terms – such as
those commonly negotiated by a vendor with a lease back to it or
leases to related parties
rent payable under the lease that is under-market value
and/or
the lease is otherwise detrimental to the value of the
land.
The scope of the judgment is yet to be tested and in that regard
a court in the future may yet decide to curtail the potential
effect this judgment may have on "innocent third
parties". A court might also limit the case to its facts or
simply weigh the prejudicial effect on third parties (such as
tenants) more in favour of the third party.
Other Considerations
While the decision in this case provides clarification for
liquidators of landlords and their rights to disclaim leases, it
raises several questions for other players in the market:
Tenants – security of tenure for tenants
is brought into question by this case and tenants may be more
cautious when entering into leases and seeking confirmation and
guarantees regarding the solvency of a landlord.
Landlords – landlords may need to
consider how they may give tenants comfort as to their solvency and
how they may safeguard and protect the value that tenants ascribe
to leasehold interest which may be adversely affected where a
landlord is unable to provide comfort as to solvency (and
consequently security of tenure).
Lenders – lenders may need to adjust
their lending criteria having regard to the potential affects on
security of tenure and valuation of leasehold interests.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
Best Lawyers and IFLR1000.
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