Liquidators can disclaim a landlord’s lease – terminating a tenant’s interests

MSI - LEASEBy Chris Drayton, Makinson d’Apice, Lawyers, Sydney.

The High Court of Australia has held that liquidators may disclaim a lease (i.e. cancel a lease) that a landlord had granted to a tenant. The decision would therefore terminate the tenant’s leasehold estate or any interests in the land and require the tenant to prove for any loss.

In a recent majority decision (reference Willmott Growers Group Inc v Willmott Forest Ltd (Receivers and Managers Appointed) (In Liquidation)) the High Court of Australia held that a liquidator for the landlord could rely on section 568 of the Corporations Act 2001 (Cth) (Corporations Act) to disclaim a lease. The landlord owned land that was used for individual forestry plantations and included a 25 year lease, under which each tenant had a right to grow and harvest trees on their land. The landlord became insolvent and the winding up of the landlord had commenced. The position at law had been well established that section 568 of the Corporations Act would entitle a liquidator of a tenant to disclaim a lease of property.  Of issue was the question whether or not the same section would allow a liquidator of a landlord to disclaim a lease granted to a tenant and if so what the effect of the disclaimer would be.

The decision of the High Court makes it clear that a liquidator of a landlord can disclaim a lease and that the effect of the disclaimer is that the liabilities of the landlord under the lease are terminated from the day on which the disclaimer takes effect as are the correlative rights of the tenant.  The disclaimer does not however remove the right of the tenant to claim in the winding up of the landlord for losses suffered by it as a result of the early termination of the lease.

The decision is well worth reading for those interested in this area of the law and is of importance to both landlords and tenants.

From the perspective of the tenant it is appropriate for the tenant to now consider when negotiating a lease whether the tenant should obtain an express right of early termination (and possibly an express right to damages) where the landlord becomes insolvent.  A tenant may prefer to end a lease at this point having found alternative premises rather than wait for an eventual possible disclaimer of the lease.  Commercially it may be difficult to negotiate such a provision in to the lease but it is a point to consider for the tenant.

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