Liability of replacement RE for damages for breach of the lease. Primary RE Ltd v Great Southern Property Holdings Ltd & Ors [2011] VSC 242

The final comments made by the Court in the Primary RE case related to the potential liability of Primary RE to a claim for damages for breach of the lease that accrued prior to its appointment as replacement RE.

This argument appears to arise out of the operation of s 601FS (discussed in more detail elsewhere in this blog), which makes the obligations and liabilities of the old RE in relation to the scheme the liabilities and obligations of the new RE.

The Court found that:

• Primary RE’s exposure to liability on the counterclaim was conditional on Primary RE becoming entitled to rights as tenant; and
• that circumstance would arise, and Primary RE would be liable for damages, if the terminations were not valid or if Primary RE could succeed in its application or relief from forfeiture.

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The finding implicit in the Court’s comments are that the replacement RE cannot have the burden of the leases without their benefit. However, it is not clear how this distinction arises out of the words of s 601FS.

One of the ongoing issues for the replacement of responsible entities of distressed managed investment schemes is the risk of unexpected liabilities under ss 601FS and 601FT. The Court’s comments suggest that there is a limit to the operation of s 601FS. However, the extent of that limitation remains unclear.

The relevant discussion is found at paragraph [203] of the judgment.