Tuesday, March 6, 2012

Disclaimer of a lease by a landlord: Willmott Forests Ltd [2012] VSC 29

The matter of Willmott Forests Ltd [2012] VSC 29 was a preliminary question before Davies J of the Supreme Court of Victoria. The proceedings arose from managed investment schemes involving forestry plantations. The liquidator was seeking court approval to disclaim leases held by the grower investors. The preliminary question was 'Are the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land?'. The answer to this was 'no' (at [4]).

Her Honour summarised the facts which led to the decision at [1]:
The first plaintiff, Willmott Forests Limited (“WFL”) is the responsible entity and/or manager of eight registered managed investment schemes (“MIS”), six unregistered “Professional Investor” MIS, eleven unregistered contractual MIS and five unregistered partnership MIS. These MIS are forestry operations conducted on land which is either freehold land owned by WFL or leased by WFL from third parties. The members of the MIS (“the Growers”) have rights to grow and harvest trees on that land under project documents that include lease and licence agreements with WFL for the use and occupation of the land. WFL is in liquidation and the liquidators have entered into six interdependent contracts (“the sale contracts”) for the sale of part of the freehold land, unencumbered by the rights of the Growers conferred by the project documents, including the leases and licences (“the Growers’ rights”). A transfer of clear title to the freehold land cannot be effected unless the Growers’ rights are terminated or extinguished. 
The application arose because the sale contracts required the freehold land to be sold unencumbered by the rights of the growers, including in the leases. The liquidator sought to disclaim the leases under the power contained in s568 of the Corporations Act 2001. In a previous proceeding, the liquidators were given approval to disclaim the leases 'on the condition that the liquidators seek the Court’s consent before disclaiming the project documents' (at [1]).

s568 provides as follows:
(1) Subject to this section, a liquidator of a company may at any time, on the company's behalf, by signed writing disclaim property of the company that consists of:
(a) land burdened with onerous covenants; or
(f) a contract;
whether or not:
(g) except in the case of a contract--the liquidator has tried to sell the property, has taken possession of it or exercised an act of ownership in relation to it; or
(h) in the case of a contract--the company or the liquidator has tried to assign, or has exercised rights in relation to, the contract or any property to which it relates.
The critical section considered was s568D, which provides as follows:

568D(1) [Effective disclaimer terminates company’s rights] A disclaimer is taken to have terminated, as from the day on which it is taken because of 568C(3) to take effect, the company’s rights, interests, liabilities and property in or in respect of the disclaimer property, but does not affect any other person’s rights or liabilities except so far as necessary in order to release the company and its property from liability
Her Honour considered that in the case of an insolvent tenant, the termination of the tenant's rights, interests, liabilities and property in or in respect of the disclaimer property ends the lease. Whereas in the case of an insolvent landlord this does not end the lease because (at [11]):
a disclaimer of the lease by the liquidator of the landlord would only terminate the rights, interests, liabilities and property of the landlord but it would not bring the lease to an end for all purposes. [13] Specifically, it would not bring the tenant’s proprietary interest in the land to an end. The tenant’s proprietary rights in the land will continue to subsist, even though the effect of disclaimer is that the landlord’s interests and liabilities under the lease have been terminated. Thus the effect of disclaimer is different where the lease is disclaimed by the liquidator of the landlord.
Her Honour summed up the issue as follows (at [14]): 'Is the termination of the Growers’ leasehold estates necessary to release WFL or its property from liability?'. In answering this, Her Honour said as follows (at [16]):
In my view, it does not follow a fortiori that the disclaimer would operate upon the separate property rights of the Growers by virtue of the proviso. First, it is not apt to describe a leasehold estate as a liability nor is it apt to characterise it as an encumbrance on the landlord’s property. A leasehold estate is a grant of property right and the grant of property right confers on the tenant different legal rights in the property than the rights attaching to the landlord’s reversionary interest. It is therefore unnecessary to extinguish the Growers’ leasehold estates in order to release WFL’s property from its liability. Moreover, it is to be borne in mind that the property proposed to be disclaimed is the contract for lease, under which WFL has already leased the land to the Growers. It is therefore unnecessary to interfere with the Growers’ property rights in order to release WFL from its liability to lease because the leases have been effected. Accordingly, the answer is that the proviso in s 568D has no application.
The decision is interesting because it suggests that in circumstances where a lease imposes some 'liability' on an insolvent landlord (e.g. maintenance obligations), then the landlord is able to disclaim that liability but the lease (particularly the interest of the tenant in the land) could otherwise remain intact. The issue of the severability

I understand that an application has been made for leave to appeal.

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