In a recent decision of the High Court, the majority 4-1 (Keane J dissenting) confirmed that a liquidator has the power to disclaim leases notwithstanding the rights and interests of an existing tenant.
Shane Wallace, a solicitor in the insolvency team, provides an overview of the majority’s findings.
Facts & Earlier Decisions
Willmott Forests Limited (“Willmott”) operated a number of commercial forestry schemes. The business structure involved the leasing of land owned by Willmott to investors (called Growers) who also executed a forestry management agreement authorising Willmott to establish, maintain and eventually harvest the plantation.
After facing financial difficulties, Willmott’s creditors resolved to place the company into liquidation in 2011. The company’s liquidators, in conjunction with the Receivers, marketed the various properties of Willmott to prospective purchasers in an extensive campaign. However, none of the expressions of interest indicated a willingness to purchase the land subject to the existing tenancies of the Growers.
The liquidators then sought to disclaim the Grower’s leases pursuant to s.568 (1) of the Corporations Act 2001 (Cth) (‘the Act’) and entered into various conditional contracts for the sale of the unencumbered freehold.
The liquidators approached the Supreme Court of Victoria for directions and orders regarding the contracts pursuant to s.511 of the Act. Willmott Growers Group Inc (“WGG”), an association of the Growers of the Schemes, sought leave to intervene as contradictors to the liquidator’s arguments.
Her Honour Justice Davies rejected the Liquidators purported disclaimer, finding that it could only relate to Willmott reversionary interest in the lease, and not affect the tenant’s rights. Her Honour’s reasoning relied on s.568D of the Act, in that it was not necessary to interfere with the Growers rights under the leases to discharge Willmott from its liability associated with the leases.
The decision was overturned on Appeal to the Victorian Court of Appeal (Warren CJ, Redlich JA and Sifris AJA), who held that the critical question is ‘how far is it necessary’ (under s.568D of the Act) to disclaim the leases of the Growers in order to discharge Willmot from its liabilities. Their Honours held it was necessary to extinguish the Growers rights under the leases in order release Willmott from its liability.
The High Court’s Decision
By special leave, WGG appealed to the High Court. Senior Counsel for WGG raised two arguments:
Firstly it was argued that the ‘proper’ subject of the disclaimer of the leases was that of the reversionary interest of Willmott, and not one, which affected the tenants’ rights under the lease.
The Court rejected this argument and in particular WCG’s contention that the subsections in s.568(1) were to be used in exclusion to the other subsections contained in that section. The Court held that the leases were properly construed as ‘contracts’ capable of being disclaimed under one or more of the subsections contained in s.568(1).
Secondly, upon WGG’s concession that a lease is as a contract capable of being disclaimed, than under s.568D, the disclaimer only took effect so far as was necessary to release Willmot from its liabilities under the lease, but not so as to affect the rights of third parties under the lease.
In support of this argument, WCG contended that the section did not operate to destroy a third person’s interest in the property, which existed before the disclaimer, such as the rights of the Growers under the lease.
The Court rejected that submission. The Court held that in order to extinguish Willmott’s liabilities under the lease, including the obligation to provide quiet enjoyment and non-derogation from grant, it would necessarily follow that the tenants’ rights under the lease would need to be terminated, notwithstanding their proprietary interest. Indeed this is what the legislative provision envisaged. The Court further added that the tenants were not to be construed as ‘third parties’ within the meaning of the section, and that following termination of the lease, their rights under the terminated lease became that of unsecured creditors of the company in liquidation.
It is not uncommon for Liquidators to sell a company’s real property subject to existing tenancies. In this situation, the purchaser of the property does so subject to the rights and liabilities under the lease.
However, when there is no interest from prospective purchasers in buying the property with existing tenancies, this decision provides critical guidance to liquidators.
Liquidators should ensure that before making the decision to disclaim a lease which includes a current tenancy, that a suitable marketing campaign is conducted, which establishes that there are no prospective purchasers who would take the property subject to the lease. Indeed the Court would need to be satisfied of this.
Tenants entering into long-term leases in ‘unique’ properties, such as agribusiness schemes, should also carefully consider their position.
About the Author
Shane Wallace is a solicitor and former practitioner at Carneys who primarily practises in the areas of Aviation, Insolvency & Dispute Resolution.