Disclaimer of a lease by the landlord’s liquidator does not extinguish the tenant’s property

 

[ED – the decision in this case has been overturned by the Court of Appeal – see subsequent post here.]

Her Honour Davies J in the Victorian Supreme Court has ruled that the liquidator appointed to a land owning company cannot use the disclaimer power under the Corporations Act to disclaim leases over that land.

In Willmott Forests Ltd (Receivers and Managers Appointed) (In Liq) & Ors [2012] VSC 29, handed down today, the Liquidators had entered contracts to sell land on which the Willmott forestry schemes’ plantations were established.  The Liquidators agreed to sell the freehold free of the Growers’ leasehold estates and sought judicial advice on whether the disclaimer power under s 568 of the Corporations Act could be used to extinguish the Growers’ leases.

The Growers argued that the disclaimer power could not be used to extinguish their leases.  The Growers’ arguments were accepted.

This decision has significance for the restructure and liquidation of agricultural or forestry managed investment schemes.  It prevents the Liquidator from unilaterally extinguishing Growers’ leases (provided the Growers are not otherwise in default), affording the Growers a greater opportunity to restructure their schemes.

The decision also has wider significance.  For example, a Liquidator could be appointed to a company that owned a large shopping centre.  If the Liquidator could use the disclaimer power to extinguish shop owners’ leases, then he or she may be able to disclaim a large number of leases in the centre.  The Liquidator could then either sell the land free of those leases, re-let the shops at a higher rent or try to extract higher rent from sitting tenants.  This would, in turn, increase the value of the freehold for the benefit of the company’s creditors at the expense of shop owners.  Her Honour Davies J’s decision, it appears, prevents this from happening.

As far as I am aware, the use of the disclaimer power in this way was first raised before Robson J in Re Timbercorp Securities Ltd (in Liq) (No 3) (2009) 74 ACSR 626 [2009] VSC 510.  It was also argued before Davies J in BOSI Securities Services Ltd v Australia and New Zealand Banking Group Ltd (2011) 84 ACSR 341; [2011] VSC 255 and before Dodds-Streeton J in Willmott Forests Ltd, in the matter of Willmott Forests Lit (Receivers and Managers Appointed) (In Liq) [2011] FCA 1517.  However, this is the first time that an Australian court has ruled on this question.

Congratulations to Garry Bigmore QC and Matthew Kennedy, instructed by Clarendon Lawyers, whose submissions were accepted by the Court.

About Sam Hopper

Sam is a property and insolvency barrister.

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5 Comments on “Disclaimer of a lease by the landlord’s liquidator does not extinguish the tenant’s property”

  1. Mark Bland Says:

    And kudos to you Sam in building up the body of knowledge in the area. The judgment leaves it open to the liquidators to disclaim the leases, noting it would be ‘inutile’. If they did, is it right that the ‘leases’ would terminate? While the lessee would retain its legal estate, would it still be a lessee with a lease?

    Reply

    • Sam Hopper Says:

      Thanks for the comments Mark.
      We will have to see how that part of the case pans out over time. However, I have trouble seeing how the lease could terminate if the landlord’s liquidator is unable to disclaim and extinguish the tenant’s interest in the land.

      Reply

Trackbacks/Pingbacks

  1. Disclaimer of a lease by the landlord’s liquidator does not extinguish the tenant’s property – part II | Sam Hopper Barrister - May 23, 2012

    […] reasons discussed on my earlier post here, the decision is potentially significant, particularly if liquidators of shopping centre leases […]

  2. Disclaimer of a lease by the landlord’s liquidator – part 2 | Sam Hopper Barrister - September 3, 2012

    […] decision overturns a decision by Davies J, discussed in an earlier post here.  That post also sets out some of the background to the […]

  3. Willmott special leave to appeal application filed | Sam Hopper Barrister - October 4, 2012

    […] For more discussion on the decision, refer to earlier posts here and here. […]

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