Do you have an enforceable lease if your landlord is in liquidation?

Leasing eBulletin - 9 December 2013

Summary

The High Court in Willmott Growers Group1 has upheld a Victorian Court of Appeal decision that a lease can be disclaimed by the liquidator of a landlord. The decision will have very significant implications for tenants including:

  • Where a company goes into liquidation, the liquidator may disclaim (by written notice) any property that:
    • consists of land burdened by onerous covenants;
    • is not readily saleable;
    • may give rise to a liability to pay money or some other onerous obligation; or
    • would result in an unprofitable sale.
  • A landlord's rights under a lease agreement are 'property' derived from a contract which can be disclaimed.
  • If a tenant receives a notice of disclaimer of lease from a liquidator, they should urgently seek legal advice about having the disclaimer set aside.


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Willmott Forests Ltd (WFL) was the manager of various investment schemes including partnership arrangements involving the lease of properties to investors (Growers), entitling them to grow and harvest trees on parcels of land. WFL grew the trees but was unable to generate any revenue sufficient to offset the costs of administering the scheme until the trees were harvested.
When WFL went into liquidation, the liquidators tried to sell WFL's land (either with or without the lease agreements). The only offers to purchase the land were made on the basis that it was unencumbered by the leases. The liquidators then applied to the Victorian Supreme Court to get approval of the lease disclaimers. This application was unsuccessful, but ultimately reversed by the Victorian Court of Appeal.

 

The High Court's decision

The central issue concerned the interpretation of section 568(1) of the Corporations Act (Act) and specifically what constituted the "property of a company'". The Growers claimed the Court of Appeal misdirected itself by construing section 568(1) to mean that 'property of a company' included not only the company's rights and interests but also the rights and interests of the other party to the contract.

The Growers claimed the Court of Appeal should have construed section 568(1) to mean property that consists of the rights and interests of the company under a contract which, in this instance, given rent had been prepaid, were limited to a right of re-entry on expiration of the lease contracts.
A majority of the High Court upheld the Court of Appeal's decision stating:

  • The Act gives a company's liquidator power to disclaim leases which the company has entered into. The liquidator can renounce all of the company's rights, interests and liabilities under those contracts. 
  • A disclaimer operates to end the rights of a tenant arising under a lease, and this includes the liabilities of a landlord in liquidation.

Interestingly, the Court of Appeal commented that the leases in question were analogous to "shopping centre leases". The High Court did not comment on this issue.

 

What does this mean for tenants?

The High Court has confirmed a tenant's lease could be unilaterally extinguished. This raises serious concerns for any tenant who is asked to relocate after having invested a significant sum of money in the construction, fit-out and establishment of leased premises, has a lease with good commercial terms, or who does not wish the relevant premises to be made available to a competitor.

There are a number of grounds listed in the Act which enable disclaimer of a lease or other contract of a company in liquidation eg. an agreement to lease. A liquidator could seek to disclaim a lease where it would be costly to keep the property with a lease in place, for example if significant structural repairs are required, if the rental income is significantly under market, or if works are required to complete the leased premises or a shopping centre in which the leased premises are located.

 

Practical tips for tenants - challenging a disclaimer

In the event that a tenant receives a notice of disclaimer of their lease from their landlord’s liquidator, they should make a court application within 14 days of the liquidator’s notice.

The tenant must satisfy the court that the disclaimer will cause prejudice to the tenant that is out of proportion to the prejudice that setting aside the disclaimer will cause to the landlord company's unsecured creditors. In that regard, a tenant may point to business interruption or other losses it will suffer if the disclaimer is not set aside.

If you require any assistance or further information, please contact Patrick Joyce or Lee Wolveridge or your usual Lander & Rogers contact.

Authors
Lee Wolveridge | Partner
Patrick Joyce | Special Counsel
Tahmina Jamall | Seasonal Clerk

Further information

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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