The disclaiming of leasehold interests by liquidators
On 10 May 2013, the High Court granted special leave to appeal the Victorian Court of Appeal’s decision in Willmott Forests Ltd (Receivers and Managers appointed) (in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc  VSCA 202.
The Court of Appeal unanimously reversed the decision of Judge Davis at first instance, and found that a tenant’s leasehold interest in land is extinguished by the disclaimer of a lease agreement by a liquidator of a landlord.
This is an unusual scenario that may have significant consequences for tenants, given that it is rare for liquidators of land to disclaim lease agreements. Tenants need to be aware that if they receive a notice of disclaimer of their lease from their landlord’s liquidator, they should consider making an application to have the disclaimer set aside.
The application has to satisfy the court that the disclaimer will cause prejudice to the tenant out of proportion to the prejudice that setting aside the disclaimer will cause to the company’s creditors.
It is especially important for tenants to realise that they have to make the application under section 568B of the Corporations Act 2001 (Cth) (“The Act”) within 14 days of receiving the notice of disclaimer by the liquidator.
Our advice and assistance in the making of the application should be sought immediately upon receipt of a notice of this type.
Disclaimer by a liquidator
Liquidators are given the power to disclaim the property of a company under section 568(1) of the Act, which has the effect of terminating a company’s rights, interests and liabilities for that property.
So a third party’s rights about that property are only affected so far as necessary to release the company from liability.
The facts of the Willmott decision
Willmott Forests Ltd (“WFL”) leased its land to various parties (“the Growers”) to be used for forestry plantations. The lease agreements entitled the Growers to grow and harvest trees on the land for a term of 25 years.
WFL went into liquidation. The liquidators wanted to sell WFL’s interests in the land unencumbered by the lease agreements. The liquidators sought directions from the court as to whether they could disclaim the leases, and extinguish the tenants’ interests in the land.
At first instance, Judge Davies found that the disclaimer of the lease contracts did not extinguish the lessees’ proprietary interests in the land.
The Victorian Supreme Court of Appeal reversed the decision and unanimously found that the disclaimer of a lease agreement by a liquidator extinguishes a tenant’s leasehold interest in land.
The Court decided that the landlord’s obligation to provide possession and quiet enjoyment is a continuing obligation, as opposed to an accrued one that a disclaimer cannot terminate. The Court also considered that leases are contractual, as opposed to proprietary in nature.
The High Court appeal
The appeal to the High Court of Australia was heard in August of this year but no decision has been handed down at the time of writing. We will provide commentary on the High Court decision as soon as it is available.