Landlords entitled to disclaim leases in insolvency cases

In December 2013, the High Court confirmed that a liquidator of a corporate landlord may disclaim a lease that the company had granted to a tenant, leaving the tenant to prove they have suffered loss in the winding up.

Broadly speaking, it is common for the liquidator of an insolvent lesee to repudiate the lessee’s tenancy obligations. It is now clear that a corporate landlord may similarly avoid unfavourable leases to which it is committed, simply by renouncing those leases in liquidation.

Streeterlaw explained the implications of the decision: Tenants and investors beware! This decision effectively terminates a landlord’s obligations to his tenants in the event of his company being liquidated. As a result of this case, tenants and any financiers should start requesting special conditions in their lease arrangements to minimise the risk of possession.

The Wilmott case clarifies the scope of the liquidators’ statutory power of disclaimer. Tenants, along with financiers, have a clear risk in taking security over tenants’ interests in leasehold property.

The facts of the case

Willmott Forests Limited (Willmott) managed a number of forestry investment schemes. Under these schemes, Willmott leased portions of land to scheme participants who were growing and harvesting trees. The arrangement involved an agribusiness investment scheme, with a number of 25-year leases which required payment of the rent in advance. In short, the terms of these leases made these properties unmarketable and difficult to sell.

Willmott was placed into administration and then liquidation. The liquidators attempted to sell the properties and included a condition that title to the assets was to pass to the purchaser free from encumbrances and that title to the trees on the land was to pass to the purchaser at settlement. This effectively would mean that the tenants lost the right to maintain and harvest the trees that they had planted on the leased property.

At that stage, the liquidators applied to the Supreme Court of Victoria for directions about the state of the negotiation in relation to the sale. Justice Davies directed that the liquidators could not disclaim the growers’ leases.

On appeal, the Victorian Court of Appeal set aside that decision and decided that the liquidators could disclaim the growers’ leases. The growers then appealed to the High Court.

The High Court decision

On 4 December 2013, the majority of the High Court upheld the decision of the Victorian Court of Appeal.

The High Court focused on two key issues:

1. Whether section 568(1) of the Corporations Act 2001 (Cth) (the Act) gives the liquidator of a company power to disclaim a lease that the company granted to a tenant; and
2. If the liquidator has the power to disclaim such a lease, what is the effect of the disclaimer and can the liquidator of a landlord disclaim a lease.

Section 568(1) of the Act provides that a liquidator may disclaim certain property of a company, including property that consists of a contract. However, s568(1A) of the Act provides that “a liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court”.

In the Willmott case, the significant issue was whether the reference to ‘a lease of land’ in s568(1A) extended to any lease to which the company was a party or was restricted to leases where the company was a tenant.

The majority of the High Court found that each lease between Willmott and the growers was the property of the company, consisting of a contract under s568(1)(f) of the Act which could be disclaimed.

Impact of the Willmott decision on tenants’ interests

The Willmott decision highlights:

• Risks both for tenants and for financiers with security over tenants’ interests in leasehold property, where the landlord has the potential to enter liquidation during the term of the lease.
• Broader questions about the possible implications of a liquidator’s power of disclaimer on other types of proprietary rights held by third parties in relation to the property of companies in liquidation.
• Broader implications for more common types of leasehold arrangements, particularly in situations where the liquidator of a landlord forms the view that a property may be more readily saleable, or sell for a higher price, without the existing leasehold arrangements in place.

Case appraisal conference

If you are facing a dispute, Streeterlaw’s Fraud and Insolvency Group can advise you on:

• Your legal rights and obligations in relation to Insolvency generally and the mechanisms available to creditors to enforce debts;
• How to resolve these disputes efficiently and cost-effectively; and
• Any alternative dispute resolution methods open to you to deal with the dispute.

Please contact Streeterlaw Sydney office to arrange a Case Appraisal Conference. Enquiries can be made by email to advice@streeterlaw.com.au or by calling 8197 0105.

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

Call us on 02 8197 0105 to book an appointment with Mark Streeter!