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Liquidators’ powers to “disclaim” leases: Tenants be warned if your landlord appoints a liquidator

Insolvency Law News | February 2013

The power of liquidators to disclaim leases is contained in s568 of the Corporations Act, which is designed to allow liquidators to free an insolvent company from liabilities, expenses and burdens rooted in the company’s ownership of property or involvement in onerous contracts or agreements that were entered into before the company’s insolvency. The purpose of this power is to allow liquidators to free an insolvent company from obligations as landlords or as tenants that stand in the way of a quick and efficient winding up.

The recent Victorian Court of Appeal decision in Willmott Forests Ltd (in Liq) [2012] shed some light on the rights of liquidators of a landlord company in this regard.  Willmott Forests [“Willmott”] went into liquidation, and the liquidators sought to sell the land owned by the company. To do this, the liquidators were required to give “clear title” to the land to the buyer, which effectively meant that existing Leases over the land had to be terminated or extinguished. The liquidators approached the Court for orders to the effect that they be permitted to disclaim all Leases current over the company’s land, thereby extinguishing the Lessees’ (tenants’) Leasehold interests in the land.

At first instance, the trial judge held that the liquidators could disclaim the Leases under s568 of the Corporations Act, but that this would not extinguish the Lessees’ Leasehold interests in the land – these Leasehold interests would continue to subsist.  Essentially, the trial judge stated that, although disclaiming the Lease could effectively terminate the Lessor’s (company’s) ongoing responsibilities, entitlements and liabilities under the Lease, it could not terminate or extinguish the Lessee’s ongoing proprietary (Leasehold) interest in the land. 

On appeal, the Court overturned the trial judge’s decision, holding that the disclaimer of a Lease by a liquidator is effective to terminate all rights, responsibilities, liabilities and entitlements of both the Lessor and the Lessee under the Lease, and to extinguish the Lessee’s Leasehold interest in the land in the process. 

The Court noted that, while this conclusion meant that the effect of a liquidator disclaiming a Lease would be to displace the rights of “innocent parties” (Lessees), it was nevertheless necessary for the Court to find that the disclaimer was effective to terminate the Lessee’s Leasehold interest in the land in order to give effect to the purpose of s568 of the Corporations Act

Lessees should note, however, that the Corporations Act does make provision for Lessees affected by a liquidator’s disclaimer of Lease to prove as creditors of the failed Lessor in respect of losses suffered as a result of the disclaimer.

If you have any questions or concerns regarding your rights and obligations under an existing Lease, or if you are concerned about the solvency of your company or business and your responsibilities in this regard, please contact Annette at Forum Law to arrange a consultation.

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