Ten­ants beware — High Court con­firms liq­uida­tors of land­lord com­pa­nies can dis­claim leases

In Brief

The High Court has recent­ly con­firmed that the liq­uida­tors of a land­lord com­pa­ny are able to dis­claim a lease, with the effect of ter­mi­nat­ing the lease­hold inter­est of the tenant.

The High Court deci­sion of Will­mott Grow­ers Group Inc v Will­mott Forests Ltd (Receivers and Man­agers Appoint­ed) (In Liq­ui­da­tion) con­cerned an appeal to the High Court from the Supreme Court of Vic­to­ria on the fol­low­ing points:

• Does s568(1) of the Cor­po­ra­tions Act (C’th) 2001 (the Act) empow­er a liq­uida­tor to dis­claim a lease which a com­pa­ny has grant­ed to a ten­ant; and
• If a liq­uida­tor has such pow­er, what does s 568D(1) of the Act pro­vide to be the effect of that disclaimer.

In con­sid­er­ing the effect of s 568(1) of the Act and the sub­se­quent oper­a­tion of s 568D(1) of the Act, it was held:

• For the pur­pos­es of s 568(1)(f) of the Act, a lease of land by a com­pa­ny is prop­er­ty of the com­pa­ny which can be dis­claimed upon liq­ui­da­tion of the company.
• The effect of the dis­claimer is to ter­mi­nate the com­pa­ny’s rights, inter­ests, lia­bil­i­ties and prop­er­ty in or in respect of the dis­claimed property.
• In the case of a lease of land, this would have the effect of ter­mi­nat­ing the ten­an­t’s rights (includ­ing the right of qui­et enjoy­ment and the right to non dero­ga­tion of the grant of exclu­sive pos­ses­sion) and thus, the ten­an­t’s inter­ests are brought to an end.
• A ten­ant has the right to prove in the wind­ing up of the com­pa­ny as cred­i­tors for what­ev­er dam­age it incurs as a result of the disclaimer.

Facts

Will­mott Forests Ltd (WF) was the respon­si­ble enti­ty of var­i­ous man­aged invest­ment schemes (the MIS) which under­took forestry oper­a­tions in the nature of tree plan­ta­tions. The plan­ta­tions were cul­ti­vat­ed by the MIS on land either owned by WF or leased to WF, which was sub­se­quent­ly leased or sub­leased by WF to the MIS for terms of gen­er­al­ly 25 years.

In Sep­tem­ber 2010, WF went into vol­un­tary admin­is­tra­tion and its cred­i­tors resolved that it be wound up. The liq­uida­tors con­clud­ed the MIS could not con­tin­ue to oper­ate as it was high­ly unlike­ly a par­ty would take over as respon­si­ble enti­ty and man­ag­er of the MIS where that par­ty would be required to assume the lia­bil­i­ties of WF. The liq­uida­tors sought to sell off WF’s assets, includ­ing its free­hold land and its inter­ests as lessee of cer­tain land on which plan­ta­tions were already estab­lished. The con­tracts of sale pro­vid­ed that title would pass to the pur­chas­er, free from encumbrances.

First instance decision

Davies J of the Supreme Court of Vic­to­ria found that it was unnec­es­sary to inter­fere with a lessee’s prop­er­ty rights in order to release a lessor from lia­bil­i­ty. It was held that whilst a con­tract for a lease was prop­er­ty capa­ble of being dis­claimed by a liq­uida­tor, it would not have the effect of dis­tin­guish­ing the lessee’s lease­hold estate.

Appeal

Jus­tice Davies’ deci­sion was over­turned on appeal, with the Court find­ing that a lease­hold inter­est, as gov­erned by a con­tract of lease, can­not sur­vive the ter­mi­na­tion of the very con­tract which cre­at­ed it.

High Court

The appel­lant, Will­mott Grow­ers Group Inc (WGG) assert­ed on behalf of the MIS that a vest­ed inter­est in land could not be bought to an end by dis­claimer of the con­tract which cre­at­ed that interest. 

The effect of a dis­claimer (being that from the rel­e­vant day, the liq­ui­dat­ed com­pa­ny’s inter­ests, rights, lia­bil­i­ties and prop­er­ty in or in respect of that lease are ter­mi­nat­ed) was not con­test­ed by WGG, rather, it was assert­ed that the ter­mi­na­tion did not bring the ten­an­t’s rights to an end.

This view was not shared by the major­i­ty, which held:

• A lease grant­ed to a ten­ant by a com­pa­ny is, for the pur­pos­es of s 568(1) ​“prop­er­ty of the com­pa­ny” and specif­i­cal­ly falls with­in the mean­ing of a con­tract in s 568(1)(f). This being the case, the effect of a dis­claimer under s 568D requires that a ten­an­t’s rights and lia­bil­i­ties are ter­mi­nat­ed (includ­ing the com­pa­ny’s oblig­a­tion to pro­vide qui­et enjoy­ment and to not dero­gate from the grant of exclu­sive pos­ses­sion) in order to release the com­pa­ny and its prop­er­ty from lia­bil­i­ty from the date the dis­claimer takes effect.
• The rights and oblig­a­tions imposed by a lease which become attached to an inter­est in land of the lessor and the lessee, ​“does not detract from the under­ly­ing legal char­ac­ter of a lease as a species of contract”.
• A per­son aggriev­ed by a dis­claimed con­tract is tak­en to be a cred­i­tor of the com­pa­ny to the extent of any loss suf­fered and may prove that loss as a debt in the wind­ing up of the company.

In dis­sent, Keane J con­clud­ed that the liq­uida­tors’ dis­claimers were inef­fec­tive with­out leave of the court pur­suant to s 568(1A) of the Act. His hon­our also con­clud­ed that whilst a dis­claimer would release WF from its oblig­a­tion under the leas­es, it would not be effec­tive to deprive MIS of its right of pos­ses­sion for the remain­der of the lease term.

What should you do?

If you are a ten­ant and you have con­cerns about the impli­ca­tions of this deci­sion on your lease tenure, please con­tact us.