The High Court has just confirmed that a Liquidator of an insolvent Lessor company has the ability to disclaim a lease agreement thus extinguishing Lessee rights. Tenants in this scenario may have their tenure reduced akin to an unsecured creditor. Implications are potentially significant for tenants holding long term land leases (perhaps other assets too) from corporate entities e.g. seaport and airport operators whose dispute jurisdiction can fall under the Corporations Act rather than the traditional Port Authority State based law.

The ‘privatisation’ of Brisbane Airport, Port Of Brisbane and the proposed Gladstone Ports Corporation and Port of Townsville spring to mind.

This decision may also have broader implications for more common types of leasehold arrangements, particularly in situations where the liquidator of a Lessor forms the view that a property may be more readily saleable, or sell for a higher price, without the existing leasehold arrangements in place. This may often be the case where long term leases result in a period of below market rent.

As is often the case with High Court matters the circumstances in this matter are unusual, and are unlikely to arise for most, but the outcome has ramifications for many.

The leases were long-term leases granted under numerous forestry investment schemes for the cultivation and harvesting of forestry plantations, all for the benefit of investors who had paid up 25 years of rent in advance. In part, those schemes involved a series of leases whereby participants in the scheme would lease land on which trees would then be grown and harvested on behalf of the grower /investor /participants under the management.

The High Court’s decision turned on the finding that a lease is basically a contract (albeit one conferring property rights on the tenant) and, as such, falls under a liquidator’s statutory power to disclaim contracts entered into by the company.

The liquidator’s power to disclaim onerous property is a historic power intended to aid the liquidator in the administration of a winding up as per Section 568 of the Corporations Act 2001 which provides that that a liquidator may disclaim certain types of “property”, including:
• land burdened with onerous covenants;
• property that is unsaleable or is not readily saleable; and
• contracts.

The majority of the High Court in Willmott Growers Group Inc v Willmott Forests Ltd (receivers and managers appointed – in liquidation) [2013] HCA 51 confirmed that:

A lease is a type of contract to which the ordinary principles of contract law apply. Accordingly, there is no reason why a lease cannot be disclaimed under the final limb of s 568(1).  Pursuant to s 568D(1), the effect of the disclaimer of leases was to extinguish lessor /manager obligation to provide quiet enjoyment of the leased property.

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