In what circumstances can a liquidator of a landlord disclaim a lease?

  • Author : Bill Stark - 13-09-2012

The Victorian Court of Appeal handed down its decision in Re Willmott Forests [2012] VSCA 202 on 29 August 2012.

The case concerned the purported termination of certain leases by liquidators of a landlord by disclaiming them under section 568 of the Corporations Act, 2001. The issue was whether the liquidators could, by disclaimer, not only terminate the tenant's contractual rights under the lease, but also their proprietary rights as tenants.

In a joint judgment, Warren CJ and Sifris AJA summarised the issue at paragraph 1:

'The critical question ... is whether a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor.

In the joint judgment, their Honours held (at paragraph 25):


 

By disclaiming the contract, [the landlord] no longer has any contractual rights or liabilities under the contract. It is no longer required to perform its part of the contractual bargain. It does not have to provide the lessee with possession and quiet enjoyment. It follows that the lessee, as the other contracting party, loses its rights and is no longer required to fulfil its obligations. This is because the rights and duties of [the landlord] as lessor and the lessee are reciprocal and interdependent. However, there is a qualification to the extent to which the other parties’ interests or property is affected. It is only affected to the extent necessary to release the company from liability.

In the joint judgment, their Honours held (at paragraph 32):

In our opinion, the continuing and prospective obligation to provide possession and quiet enjoyment is not a fully accrued obligation or liability that cannot be terminated.

The joint judgment held (at paragraph 37) that s568D(1) of the Corporations Act should be given the widest possible meaning and that it included the obligation to provide possession and quiet enjoyment. They reached this conclusion on the basis that:

The section is specifically designed to enable a liquidator 'to cease performing obligations ... to achieve a release of the company in liquidation from its obligations. If [the landlord] is to be relieved of its obligation to provide quiet enjoyment, clearly and in context a liability, the interest of the lessee so far as tenure is concerned is directly related to and underpins such liability. The tenure must go. It is necessary to affect the [tenants'] rights (tenure) in order to release [the landlord] from its liability (possession and quiet enjoyment).

The joint judgment decided (at paragraph 47) there was no reason in principle or policy that the consequences of disclaiming a contract of lease should be treated in a different way to the consequences for termination of a lease by way of acceptance of a repudiation. Their Honours concluded that in both cases, the lease agreement is at an end and what follows is a matter of law, namely termination of the leasehold interest that does not depend in any way on the reason for such termination.

Their Honours also held that the leasehold interest could not survive the termination of the very document that created it and regulated the tenure of the tenant. At paragraph 58, they held:

It is this tenure which creates, and is the basis of, the obligation or liability on the part of [the landlord] to provide quiet enjoyment. Section 586D(1) allows the liquidator to terminate this obligation or liability despite its intrusion into the property rights of an innocent party. The evident policy is to permit the loss of these rights in order to enable the company in liquidation to be free of obligations so that it can be wound up without delay for the benefit of its creditors. To compensate, the rights of the affected parties are transmuted into various statutory rights and claims.

Redlich JA agreed (at paragraph 82) that s568D ought to be construed widely. His Honour found:

Save where the terms of the lease provide otherwise, the landlord will ordinarily be obliged to meet various expenses arising from ownership of the freehold to ensure the tenant's undisturbed possession of the land. But 'liability' in the context of s 568D is not to be confined to a financial obligation or immediate financial detriment. There is nothing in s 568D or Div 7 A to suggest that the term liability is not so wide as to include 'a legal obligation or duty.' The term 'liability' has a broad meaning which covers executory obligations in relation to the quiet possession, use and enjoyment of the land into the future. To release the appellants from these obligations it is necessary that the respondents' estates or interests in the leased lands be extinguished at the same time as the contracts.

This decision will obviously have far-reaching consequences for tenants of insolvent landlords who may suddenly find their business being ejected from premises that have been rented for many years, and in respect of which rent may have been paid in advance for an extended period.

Whilst the case has been decided in the context of the very broad insolvency provisions of the Corporations Act it represents another example of the expansion of the contractual elements of tenancy law, at the expense of the accrued proprietary rights of tenants.

About the Author

Bill Stark

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