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.
