High Court confirms that liquidators of a landlord company can extinguish a lease

By MST Lawyers

In the recent case of Willmott Growers Group Inc v Willmott Forests Limited, the High Court upheld the decision of the Victorian Court of Appeal which held that liquidators of a landlord company can use the disclaimer power in the Corporations Act 2001 (“Act”) to extinguish leases granted by that company.

Facts of the case:

Willmott Forests Limited (“Willmott Forests”) was the manager of forestry investment schemes associated with a group of companies known as the Willmott group. Willmott Forests leased to participants in the schemes portions of land which Willmott Forests owned or leased. In September 2010, Willmott Forests (and other companies in the Willmott group) went into voluntary administration. In March 2011, the creditors of Willmott Forests resolved that the company should be wound up and liquidators were appointed. The liquidators concluded that the schemes could not continue to operate and sought to sell the assets of Willmott Forests.

The sale contracts provided that the titles to the assets being sold were to pass to the purchasers free from any encumbrances arising out of the schemes. Contracts were negotiated in this way, as no one had expressed interest to purchase any assets encumbered by the schemes. The liquidators applied to the Supreme Court of Victoria for orders about the sales which had been negotiated. The liquidators relied on section 568(1) of the Act which gives a liquidator power to disclaim property of a company, including property consisting of a contract (referring to the leases entered into by Willmott Forests).

Supreme Court:

The Supreme Court held that the disclaimer provisions of the Act did not entitle the liquidators to disclaim the leases and extinguish the tenants’ interests in the land.

Court of Appeal:

The Court of Appeal reversed the Supreme Court’s decision. The Court of Appeal found that it was necessary to extinguish the tenants’ rights under the leases in order to release Willmott Forests from liability.

High Court:

Willmott Growers Group Inc appealed to the High Court. On 4 December 2013, the High Court held that section 568(1) of the Act gave the liquidators power to disclaim the leases granted by Willmott Forests to tenants. The Court held that a lease granted by a company to a tenant was “a contract” within the meaning of section 568(1). Accordingly, from the date of the disclaimer, the tenants’ rights under the leases were terminated and the tenants’ interests in the land were extinguished.

What does this mean for tenants?

It is not known whether a Court in the future will apply the findings of the Willmott case to liquidators of landlord companies in general, or whether the case will be distinguished as being unique to forestry investment schemes. In this particular case, it was not feasible for the liquidators to sell the assets of Willmott Forests without extinguishing the leases.  In any event, tenants should be aware of a liquidator’s right to rely on the disclaimer provisions of the Act to extinguish their leases should the landlord company go into liquidation.

The tenant may be able to set aside the liquidator’s disclaimer under sections 568B (setting aside a disclaimer before it takes effect) or 568E (setting aside a disclaimer after it takes effect) of the Act.

Both sections are onerous on the tenant, in that the tenant must prove to the Court that the disclaimer would cause, to persons who have interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company‘s creditors (and in the case where the disclaimer has already taken effect, to  persons who have changed their position in reliance on the disclaimer taking effect).

Does this case have any effect on mortgagees of a landlord company?

The High Court’s decision in the Willmott case recognises that a landlord’s liquidator has the power to extinguish a lease.  The case however, does not give the landlord’s mortgagee (or its receiver) that ability. Accordingly, tenants entering into leases should always insist that the landlord must obtain its mortgagee’s consent to the lease. A mortgagee’s consent to a lease will protect the tenant in a situation where the mortgage was granted before the lease, the landlord defaults under the mortgage and the mortgagee wants to sell the land free of the lease. If the mortgagee has consented to the lease, it must sell the land subject to the tenant’s lease.

Further, in the context of applying to set aside a disclaimer under sections 568B and 568E of the Act, in the event that the mortgagee’s consent is not obtained, if the landlord’s liquidator proves that the mortgagee can sell the land free of the tenant’s rights (regardless of the disclaimer) it may be very difficult for the tenant to show that it has suffered any real prejudice and set aside the disclaimer.

For further information on the outcome of this case or any other property matters, please contact MST Lawyers’ Property and Leasing team on +61 3 8540 0200.