On 4 December 2013, the Victorian Supreme Court of Appeal decision was upheld in the High Court by a majority.
The High Court held that liquidators of a company have the power to disclaim leases granted by the company and so terminate the landlord's obligations and the tenants' correlative rights under the leases.
THE FACTS OF THE WILLMOTT DECISION
Willmott Forests Ltd ("WFL”) was the manager of certain forestry investment schemes. WFL leased land to various parties ("the Growers") to grow and harvest trees for terms of approximately 25 years.
WFL went into liquidation. The liquidators concluded that the investment schemes could not continue to operate and sought to sell WFL's interest in the land, unencumbered by the leases.
The liquidators requested directions from the Supreme Court of Victoria as to whether they could disclaim the leases and extinguish the tenants' leasehold interest in the land.
Justice Davies found, at first instance, that a liquidator could disclaim a lease, but that the disclaimer did not affect the tenants' proprietary interests in the land.
This decision was reversed by the Victorian Supreme Court of Appeal with a unanimous finding that the disclaimer of a lease extinguishes a tenant's leasehold interest in land.
On 10 May 2013 the High Court granted special leave to appeal that decision. A majority of the High Court has now dismissed that appeal.
The High Court applied section 568(1) of the Corporations Act ("the Act") which gives a liquidator the power to disclaim the property of a company on the company's behalf. The majority confirmed that a lease is a "contract" within the meaning of section 568(1). The liabilities of a landlord, including the obligation to provide a tenant with quiet enjoyment and allow exclusive possession of the leased land, terminate from the date the disclaimer takes effect. The tenant's reciprocal rights are necessarily extinguished.
WHAT DOES THIS MEAN FOR TENANTS AND THEIR LENDERS?
The Act lists a number of grounds under which a liquidator may seek to disclaim a lease where it would be costly to keep the property with the lease in place. We suggest a liquidator is unlikely to disclaim a lease if its terms are "commercial" and not costly to keep in place.
If a tenant client receives a notice of disclaimer, the tenant has only 14 days (under section 568B) to apply to a court (Federal Court or a Supreme Court of a State or Territory) to have the disclaimer set aside, before it takes effect. The tenant must satisfy the court that the disclaimer would cause prejudice to the tenant that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors.
We suggest tenants receiving a notice of disclaimer contact us immediately for advice and to make the application if appropriate.
If a tenant becomes aware that its landlord has gone into liquidation and wishes a more proactive approach, a tenant may apply (under section 568(8) of the Act) to the liquidator to make a decision on whether or not to disclaim the lease. The liquidator then has 28 days to decide, after which the right to disclaim is lost.
GROUND AND LONG TERM LEASES
Client tenants who have long term or ground leases, where the buildings are owned by the tenants, may now need to consider how they might further protect their interest. Client tenants in this position should contact us to discuss the possible initiatives or strategies that might be available.
DOES REGISTRATION OF A LEASE PROVIDE PROTECTION?
In Australia, the Torrens title system provides a mechanism to register an indefeasible interest in land1.
However, while there is currently no case law on the issue, registration of a lease may not protect a tenant from a lease disclaimer. The High Court decision suggests that the provisions of the Corporations Act will override the traditional view of security of tenure of registered interests.
Law reform may be required to deal with the conflict between the concept of indefeasibility of title under the State and Territory real property legislation achieved by registration of the lease, and the High Court's decision that a disclaimer overrides that indefeasibility.
1 In Victoria there is no requirement for a tenant to register a lease. Section 42(2) of the Transfer of Land Act (Vic) 1958 contains an exception to the rule of indefeasibility of title which protects the interests of a tenant in possession when land is sold, despite the lease being unregistered. In Queensland the practice is to register commercial leases of any length particularly if they contain options. In South Australia leases for a term in excess of 1 year are registered. In Western Australia while leases for a term not more than 5 years with a tenant in possession need not be registered, a lease for a term exceeding 3 years, if in an approved form, may be registered. In NSW, Tasmania, ACT and the Northern Territory leases of more than 3 years are required to be registered.
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