The High Court of Australia recently considered two issues relating to a liquidator's power to disclaim a lease granted by the company in liquidation. The first issue was whether a lease is a "contract" for the purposes of section 568 of the Corporations Act 2001 (Cth) (Act). The second issue was whether the disclaimer of a lease (if available to the liquidator) terminates the tenant's leasehold estate.
The majority of the High Court determined that a lease is a contract for the purposes of section 568 of the Act, and that the disclaimer of a lease terminates the tenant's right, title and interest in the leased property. That is, the liquidator's disclaimer extinguished the tenant's proprietary interest in the leased property.
The result of the High Court's findings has potentially significant implications for landlords and tenants, including, most significantly, the uncertain tenure of a tenant's right of occupation of leased property and the risk carried by a tenant in relation to the landlord's solvency.
However, it should be noted that the Act provides the Court with power to set aside a disclaimer, including after it has taken effect, where the prejudice arising from the disclaimer is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to:
a) the company's creditors; and
b) in the case of an application to set aside the disclaimer after it has taken effect, persons who have changed their position in reliance on the disclaimer taking effect.
The Court's power to set aside a disclaimer was not considered by the Court, but provides a possible avenue for a tenant to avoid the loss of tenure of leased premises on disclaimer of the lease. Specifically, if the rent is "market" the lease should not detract from the value of the property and there are prospects of obtaining an order setting aside a disclaimer.
The best way to minimise risk arising from the High Court decision may be to:
Section 568 of the Act gives the liquidator of a company power to disclaim certain property of the company, including property that consists of a contract.
Section 568D(1) of the Act provides that disclaimer terminates the company's rights, interests, liabilities and property in or in respect of the disclaimed property from the effective date of the disclaimer. However, the Act does not address the effect of the disclaimer on any other party with rights in the disclaimed property, other than to confirm that the other party has a right to lodge a proof of debt in the liquidation pursuant to section 568D(2) of the Act.
The issues in this appeal arose in the liquidation of Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) (Willmott Forests).
On an application for directions by the liquidators of Willmott Forests, the judge at first instance, Davies J determined that the liquidators are not able to disclaim tenants' (growers) leases with the effect of extinguishing the tenants' leasehold estate or interest in the subject land.
On appeal to the Full Court of the Supreme Court of Victoria, Her Honour's judgment was overturned, with the Full Courtfinding that the disclaimer of a lease in turn terminated the tenant's leasehold estate or interest in the leased property.
The appellant in the High Court, who acted on behalf of a group of Growers in the Willmott Forests Managed Investment Schemes (Growers) submitted that termination of the landlord's rights, interests, liabilities and property in or in respect of the disclaimed lease did not bring the tenant's rights in the leased property to an end. The Growers argued that the tenant's leasehold estate in the leased property was a separate and distinct proprietary interest from the landlord's rights, interests and liabilities.
The majority of the Court disagreed with the Growers' submissions and held that, "it necessarily follows that, from the effective date of the disclaimer, the [landlord]company's liability to provide the tenant with quiet enjoyment of the leased property (and not derogate from the grant of a right to exclusive possession) and the tenant's rights to quiet enjoyment of the property (and non-derogation from the grant of exclusive possession) are terminated."1
The majority of the Court came to this conclusion because, "in every case the tenant is the party that has the liability, interest or right which is correlative to the relevant right, interest or liability of the company. And contrary to the submissions of [the Growers], the company'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. That is, … in order to release the company … from liability, it is necessary to terminate the tenants' rights under the leases."2
The matters considered by the High Court were confined to the two issues set out above. The High Court was not required to (and did not) determine:
The High Court's decision means that tenants face the risk of losing their interest in leased premises on the insolvency of their landlord. This will have flow on consequences for matters such as:
Whilst these matters may be taken into account by a Court in assessing an application under section 568B of the Act to set aside a disclaimer, they no doubt increase the need for scrutiny by a tenant before entering into significant lease arrangements.
1 [2013] HCA 51 at [8]. Gageler J's separate conclusion is at paragraphs [78] and [79].
2 [2013] HCA 51 at [54].
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