High Court Decides on Disclaimer of Leases

by K&L Gates LLP
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While it is common for a liquidator of corporate tenants to disclaim a lease, the case of Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation)[2013] HCA 51 explores the novel situation where the liquidator of a corporate landlord wishes to disclaim a lease.  

Facts
Willmott Forests Ltd (WFL) leased land to various tenants (Growers) to allow the tenants to grow and harvest trees. The terms of the leases were long term, generally for 25 years. WFL went into voluntary administration and subsequently into liquidation. The Liquidators sought directions from the Supreme Court of Victoria regarding whether the Liquidators were able to disclaim the Growers' leases with the effect of extinguishing their leasehold interests.

At first instance, Justice Davies found in favour of the Growers. That decision was overturned on appeal to the Court of Appeal of Victoria and the Growers appealed to the High Court of Australia. The first issue for determination by the High Court (was whether sections 568 to 568F of the Corporations Act 2001 (Cth) (Act) gave the Liquidators power to disclaim the leases, which would effectively terminate the Growers' leasehold interests. If the first issue was determined in favour of the Liquidators, the High Court then had to determine whether the disclaimer terminated the Growers' rights under the leases.

Legislation

Liquidators Power to Disclaim
The Actgives liquidators of a company the power to disclaim property of the company including, relevantly, property that consists of 'land burdened with onerous covenants' and 'contracts'. However, the liquidator:

  • cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with leave of the court
  • must give notice of the disclaimer to each person who might have an interest in the property.
Effect of a Disclaimer
The Act provides that the effect of a disclaimer is that it terminates the company's rights, interests, liabilities and property in or in respect of the disclaimed property, but does not affect any other persons rights or liabilities.

Arguments
The Growers argued that even if the Liquidators had the relevant power to disclaim, s 568(1) of the Act empowers a liquidator to only disclaim property of the company, submitting that the leases were the property of the Growers and not WFL. Alternatively, they also argued that even if the leases could be disclaimed as property of the company, the rights vested in the Growers were not susceptible to extinguishment by the termination of the leases.

The Liquidators argued that leases are essentially a contractual interest, dependent on the continued subsistence of the contract between lessor and lessee, and that as such the rights of a lessee are susceptible to termination upon the effective disclaimer of a lease.

Decision
By a 4:1 majority, the High Court of Australia determined that the leases are contracts between WFL and the Growers under which WFL had ongoing obligations to provide the Growers exclusive possession of land. The Growers' leasehold interests were held to be proprietary interests which derived from and depended upon the continuation of those contractual obligations.

The Liquidators disclaimer of the leases would therefore terminate those contractual obligations thereby bringing the leasehold interests to an end.

What Does This Mean and How Will it Affect you?
The discreet issue of whether liquidators of corporate landlords can disclaim leases and whether that disclaimer ends the rights of tenants has now been dealt with by the High Court. It will be interesting to see how this decision is used by liquidators in the future as the case did involve a novel set of facts.

The potential effect of the decision can be summarised as:

  • Liquidator – you can disclaim a lease and remove the tenants but you do so at the risk of the tenants bringing an application to set aside the disclaimer. Each case should be assessed on its own merits before a lease is disclaimed
  • Tenant – you may face some uncertainty regarding your continued tenancy if a corporate landlord is placed into liquidation. That remains an ongoing issue but the tenant does have the right to make an application to set aside any disclaimer
  • Financier (taking security over a lease) – where the borrower's business relies upon the lease as a significant component of its business operations, you will need to be aware of the risk if the corporate landlord becomes insolvent.

 

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K&L Gates LLP
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