In the recent decision of Re Willmott Forests Ltd,1the Victorian Court of Appeal held that a liquidator could disclaim a lease under the Corporations Act (Act).
The High Court recently granted special leave to appeal this decision. The appeal is due to be heard later this year however, in the meantime, it is important for a tenant to know what to do in the event it receives a disclaimer notice from a landlord in liquidation.
Willmott Forests Ltd (WFL) was the responsible entity of managed investment schemes, which comprised forestry operations conducted on land owned by WFL, or leased from third parties.
The members of the schemes (growers) had rights to grow and harvest trees on the land under lease agreements with WFL.
When WFL went into liquidation, the liquidators sought to sell WFL’s interest in the properties. As part of the sales, WFL’s liquidators proposed to disclaim the lease agreements with the growers in order for them to sell the land unencumbered.
The liquidators applied to the Court for approval of the disclaimers.
The following sections of the Act were pertinent to the case:
section 568(1) which provides liquidators with the power to disclaim property of a company in liquidation or contracts entered into by the company; and
section 568(A) which provides that a liquidator cannot disclaim a contract without the leave of the Court, unless the contract is an unprofitable contract or a lease of land.
The Court held that a liquidator’s power to disclaim contracts under s568(1) of the Act extends to extinguishing a tenant’s leasehold interest in land.
On 10 May 2013, the High Court announced that it would revisit the Court's decision in Willmott.
If the Willmott decision is upheld, it remains to be seen whether it will be applied more widely, or whether a Court will distinguish between different types of lease eg a pastoral lease versus a commercial lease.
It is notable that in the Willmott case the Court did not consider the application of s568B of the Act, which allows tenants the right to challenge a liquidator’s disclaimer.
What tenants should do if their landlord (in liquidation) disclaims their lease
Until the appeal of the Willmott case is determined, where a landlord serves a notice on a tenant disclaiming the lease, the tenant should consider applying to have that disclaimer set aside under section 568B of the Act.
In order to have a Court set aside a disclaimer, a tenant must:
- make an application to the Court within 14 days of the landlord's disclaimer notice; and
- satisfy the Court that the disclaimer would cause prejudice to the tenant that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors.