09 May 2016

Tenants beware—leases can be terminated


5 min

A liquidator has the power to disclaim property leases.

Liquidators are often in the position whereby they need to sell real property owned by a company. In the case of a tenanted commercial property, a liquidator would usually prefer the tenant remain in the premises and continue paying rent as this maximises the sale price the liquidator will achieve from sale of the property.

However, it is not out of the question for a liquidator to take the view that the property would achieve a higher price without the tenant. This was certainly the case for the liquidators of the Willmott Group, which was recently resolved in the High Court case of Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51.

By way of some background, Wilmott Forests Limited ('Willmott') was part of the Willmott Group that conducted a forestry operations business on land, which was either owned by the company or leased from third parties. The Wilmott Group was initially placed in voluntary administration in September 2010 and then liquidation in March 2011.

The Willmott Group was part of a Managed Investment Scheme (‘MIS’) of which the members were growers. Under the lease and license agreements with Willmott Forests, the growers were occupying the land and conducting an agribusiness.

The liquidators took action to sell the land owned by Willmott Forests and encountered problems when they attempted to transfer the titles of the land to the purchasers. The titles could not be transferred as a clear title while the leases with the growers remained in place and as a result the leases had to be terminated.

Normally a lease would be disclaimed by a liquidator under section 568 of the Corporations Act 2001, however the position was not so straight forward for the liquidators given that section 568 normally applies to 'property' of the company. As a result the liquidators made an application to the Supreme Court of Victoria under section 511 of the Corporations Act to determine whether they were able to extinguish the leases with the growers pursuant to section 568(1).

The matter was contested and eventually was heard by the High Court. In a majority decision, the High Court held that the liquidators did have the authority to disclaim the leases and that disclaimer terminates the tenants’ interests in the land. It was determined that while there was some confusion surrounding the opening words of section 568, which refer to disclaimer of "property of the company", in the majority’s view, “property” referred to “the company's possession of any of a wide variety of legal rights against others in respect of some tangible or intangible property of the company.”

Further, and most importantly, it was held that “The reference in s. 568(1A) to ‘a lease of land’ cannot be read as referring only to leases in which the company is a tenant”.

This differed from the view of the single judge of the Supreme Court of Victoria, whereby it was held that because a lease involves both a contractual right and a proprietary interest in land, the contractual rights of the leases are the only ones affected by the disclaimer. The proprietary rights in the land continue to exist. As a result, the tenancy agreement cannot effectively be extinguished by the liquidators.

However, the High Court held that the landlord’s “rights, interests and liabilities in respect of the leases cannot be brought to an end without bringing to an end the correlative liabilities, interests and rights of the tenants.” It follows that the company can only be released from its liabilities by terminating the tenants’ correlative ‘rights’ under the leases. Those rights would include both the tenants’ rights to quiet enjoyment and any proprietary interest or estate in the land.

It was also determined that the tenants would, pursuant to section 568D(2), retain the right to prove in the winding up to the extent they suffer loss as a consequence of the disclaimer of their lease.

So how does this affect tenants?

The High Court’s decision is a final determination of the interpretation of section 568 in so far as liquidators of a landlord seek to disclaim a tenant’s lease.

It is clear that liquidators have the power to disclaim a tenant’s lease—irrespective of whether the lease is unprofitable and without the need for leave of the court. However, it would be prudent for a liquidator to first seek leave of the court.

The effect of the decision is not limited to forestry operations or Managed Investment Schemes. There is no reason why the decision would not apply to ordinary commercial property or residential leases.

The exercise of a disclaimer can be a significant detriment to tenants with long-term leases, and to those who have injected a great deal of capital into the property. They may also risk losing their local customer base and goodwill.

The exercise of a disclaimer may also trigger a default under tenant’s security documents and extinguish financier’s security over the tenancy. As a result, financiers will likely require greater security.

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