The Victorian Court of Appeal has confirmed that a liquidator of a landlord can disclaim a lease with full effect, so that the land is no longer encumbered by a tenant’s interest in Re Willmott Forests Limited (Receivers and Managers appointed) (in liquidation) [2012] VSCA 202,

The decision gives liquidators the certainty of knowing that disclaimer of a lease means that a tenant no longer has any interest in the land or property.

Background

The landlord, Willmott Forests Ltd (WFL), was the responsible entity of a collection of agricultural managed investment schemes (MIS). The members of the MIS (the “Growers”) leased land owned by WFL to grow and harvest trees pursuant to lease and licence agreements.

WFL went into liquidation and the liquidators entered into sale contracts for the sale of WFL’s land. Clear title could not be transferred under the contract unless the members rights and entitlements under the leases and licences were terminated or extinguished.

The liquidators applied to the Court for directions as to whether or not they could disclaim the leases under section 568(1) of the Corporations Act 2001 (Cth) to enable them to transfer clear title to the land.

The first decision

The Court found that a leasehold interest was not a liability or encumbrance upon the property of the lessor and, on that basis, it was not necessary to extinguish such an interest to release the lessor or its property from a liability.  That is the liability risk remained with the liquidator

The liquidators appealed the decision.

Court of Appeal

The critical question on appeal was whether a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s568(1) of the Corporations Act 2001.

The Court of Appeal overturned the trial judge’s decision and held that the liquidators were able to disclaim the leases and also the tenant’s leasehold or proprietary interest in the land itself was also extinguished.

In reaching its decision the Court made the following key findings:

  • A landlord’s obligation to provide a lessee with possession and quiet enjoyment is an ongoing liability which continues for the duration of the lease. Therefore, for the landlord to be relieved of that liability the proprietary interest of the lessee must go, not just the lease contract.
  • A leasehold interest is regulated by a lease contract and, like any other contract, is extinguished upon termination of the contract. A leasehold interest does not survive the termination of the contract that created it and regulated the tenant’s tenure.
  • The purpose of section 568 of the Act is to allow a liquidator to release the company in liquidation from obligations which would otherwise prevent a prompt and efficient winding up of the company’s affairs.

Practical effects

The Willmott decision is important for liquidators, tenants (and even financiers of businesses operating from leased premises).

Liquidators will be able to disclaim a lease with the comfort of knowing that this will terminate all of the tenant’s leasehold interests – this will be of particular importance to a liquidator faced with a lease which:

  • contains financial obligations binding the landlord which cannot be recouped or offset against the rental income stream;
  • renders the freehold interest unsaleable or reduces prospects of sale;
  • is otherwise detrimental to the value of the land owned by the company (for example, tenant-friendly leases which may be significantly under market).

Tenants looking to secure long-term leases should consider the possibility that their leasehold interest could be extinguished by a liquidator’s disclaimer.

Author

Paul Taylor
Phone: 02 8568 6550
Email: paultaylor@ccsglegal.com.au

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