Commercial tenancies may be extinguished by a liquidator appointed to a landlord company by exercising the statutory right under the Corporations Act 2001 (Cth) to disclaim certain property.
Tenants, liquidators of company landlords and financiers of businesses operating in rented premises should take note, however, that a successful application for special leave to the High Court of Australia might signal a change of the liquidator's power of disclaimer.
Re Willmott Forests Ltd  VSCA 202
In August 2012, the Court of Appeal of the Victorian Supreme Court delivered a unanimous judgment in Re Willmott Forests Ltd  VSCA 202. In that case, Willmott Forests Ltd ("WFL"), the manager of a number of managed investment schemes ("MIS") and owner of various parcels of freehold land which it leased to members of the MIS under contract, disclaimed the commercial lease agreements under section 568 of the Corporations Act 2001 (Cth). The Court of Appeal found that the disclaimer of the lease agreements had the effect of extinguishing the tenants' leasehold interests in the land.
The leading judgment of Warren CJ and Sifris AJA in the Court of Appeal found that:
under the lease agreement, WFL was under a liability to provide the tenants with possession and quiet enjoyment for the duration of the lease;
termination of the contract relieved WFL of its obligation under the contract to provide the tenants with possession and quiet enjoyment; and
the tenants' contractual rights and their leasehold interests were coextensive so that the termination of the contract also extinguished the leasehold estate.
The effect of the Court of Appeal's decision is that the disclaimer of a commercial lease by a liquidator extinguishes all leasehold rights of tenants leaving the land unencumbered by a tenant's interest. Thus, not only does the disclaimer remove the landlord's liability to provide possession and quiet enjoyment, it also extinguishes the tenant's right to possession and quiet enjoyment.
Special Leave to Appeal to the High Court of Australia
On 10 May 2013, Willmott Growers Group Inc successfully applied to the High Court of Australia for special leave to appeal the Court of Appeal's decision arguing that the Court of Appeal had erred in construing the liquidator's power to disclaim lease agreements and/or leasehold interests of another party on the basis that, amongst other things, the disclaimer provisions in the Corporations Act 2001 could not operate to effectively acquire another person's property, in this case, the tenants' rights to quiet enjoyment of the land on which the schemes were conducted. The appeal is expected to be heard later this year.
How will special leave to the High Court affect the decision in Re Willmott Forests Ltd?
Essentially, until the High Court hears and determines the appeal, Re Willmott Forests Ltd remains the applicable authority to cases of disclaimer of leases by liquidators. Until the High Court hands down its decision, tenants, liquidators and financiers should proceed on the basis that liquidators of landlords are able to extinguish leasehold interests by disclaiming the lease relying on the statutory right contained in section 568 of the Corporations Act 2001.
Accordingly, parties dealing with insolvent (or potentially insolvent) landlords should note the following:
if you receive a notice of disclaimer, it is imperative you act immediately by seeking legal advice. You have a right to apply to set aside the notice of disclaimer. However, an application to set aside the notice of disclaimer should be made within 14 days of the date of the notice. Failure to meet this timeframe may result in the Court upholding the notice of disclaimer, although an application for an order setting aside the disclaimer may be made by an interested party after the disclaimer has taken effect, relying on section 568E of the Corporations Act 2001;
even if the leasehold interest is extinguished by disclaimer, you are entitled to be treated as a creditor to remedy any loss suffered as a result of the disclaimer;
similarly, even if the leasehold interest is extinguished, in order to protect the goodwill in your business, you should seek to negotiate a new lease with the liquidator.
If the High Court affirms the Court of Appeal's decision in Re Willmott Forests Ltd, the power of liquidators to extinguish commercial tenants' leasehold interests will remain, subject to any application to set aside the notice of disclaimer being made under either sections 568B or 568E of the Corporations Act 2001. Tenants, prospective tenants and financiers of businesses operating from leased premises would be well-advised to consider the solvency of company landlords for the term of the lease including any options to renew before signing, renewing leases or providing finance.
If the High Court upholds the appeal against the Court of Appeal's decision, tenants' leasehold interests will be protected against extinguishment from disclaimer. Liquidators should be aware that any notices of disclaimer purporting to extinguish a leasehold estate which are issued in the period between the Court of Appeal's decision and the High Court's decision may be subsequently challenged on the basis of a lack of a relevant statutory power.