The High Court has found it permissible for liquidators of corporate landlords to "disclaim" leases held by solvent tenants

While it has been typical for the liquidator of an insolvent lessee to repudiate the lessee’s tenancy obligations, it is now clear that a corporate landlord may similarly avoid unfavourable leases to which it is committed, simply by renouncing those leases in the liquidation. This has profound ramifications to the concept of tenant's "security of tenure" and may result in tenants and their financiers seeking further covenants from landlords or strategies to deal with the risk of loss of tenure.

The Court determined Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51 (Willmott), that a lease between an insolvent landlord to a solvent tenant is "a contract" and may be disclaimed by a liquidator in accordance with the disclaimer power in section 568 of the Corporations Act 2001.  In reaching its conclusion, the Court did not see any distinction between the "contractual nature of a lease" and the "proprietary rights of a tenant".  Rather, the Court determined that, for the purposes of the disclaimer power, a lease is properly characterised as "a contract", able to be disclaimed by a liquidator.

Implications

Often, a liquidator will want to exit certain "unfavourable" tenancies so as to improve either the realisable value of the assets of the company, or better its sales prospects.  Until now, however, terminating third party tenancies was widely thought to be unavailable - it was considered "beyond the scope" of the traditional armaments available to a liquidator in realising value for creditors.  The High Court’s decision is thus potentially wide-ranging, particularly for tenants  and their financiers under long term ground leases where the tenant has developed the improvements. 

For tenants dealing with existing leases and insolvent landlords, key points to consider are:

  • Although not addressed by the High Court, a tenant may apply to set aside a liquidator's disclaimer, before it takes effect.  Doing so, however, is expensive and challenging.
  • A more pro-active approach is for a tenant following notice of landlord's liquidation, to apply to the liquidator of its landlord, requiring the liquidator to decide whether he/she will disclaim the lease - if the liquidator does not elect within 28 days of that application, then, by section 568(8) of the Corporations Act, the liquidator loses the right to disclaim the lease.

More generally:

  • Tenants and their financiers, particularly in the case of developments under long term leases or where tenants have a substantial investment in premises, will need to consider what other arrangements are available to protect the tenant's interest. Landlords will also need to be aware that these "liquidator proof" arrangements may soon start being sought. These may include the following:
    • tri-partite arrangements with landlord's mortgagees attempting to limit the mortgagee from proceeding with a winding down of the company without agreeing to certain arrangements with the tenant (eg right of refusal, payment of compensation
    •   rights of first refusals in leases triggered automatically on a receiver being appointed to the landlord or other insolvency event (to the extent enforceable)
    • in the case of long term ground leases, to the extent possible, creating easements (which were not considered by the High Court) for a term equivalent to the term of the lease over the subject area of the leased premises. To deal with the requirement for a lot benefited, this may itself require a subdivision of land creating a small lot (eg. a nominal area) to be owned by the tenant.

These strategies and others may have their own adverse issues and limitations, but we can expect to see the development of further initiatives.

  • There appears to be inconsistency between the concept of indefeasibility of title under the Real Property Act 1990 (NSW) and the traditional view of security of tenure of registered interests and the High Court's decision. The benefits that the notion of security of tenure has afforded to commercial transactions should necessitate consideration of further law reform on this issue.