Major victory for tenants in landlord's liquidation

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It has long been a vexed question whether a liquidator can disclaim a lease with the effect of extinguishing the tenant's leasehold estate or interest in the land?

In a major victory for tenants Justice Davies has answered that question with a resounding "no".

 In In the Matter of Willmott Forests Ltd (in liquidation) [2012] VSC 29 the liquidators of a "responsible entity" in a forestry scheme sought to disclaim leases to enable the transfer of clear title to land.

Section 568 of the Corporations Act 2001 permits a liquidator to "disclaim" certain types of property of the company.

The disclaimer terminates "the company's rights, interests, liabilities and property to or in respect of the disclaimed property" (s.568D(1)). In Willmott the liquidators submitted that when a lease is disclaimed, the leasehold estate ceased to exist.

Her Honour rejected the liquidator's submission. At [9] Her Honour said that the submission:

fails to give due regard to the position in law that a lease creates both contractual and proprietary rights. A lease is a contract between the parties but a lease is also the grant by the landlord of an estate in land in the tenant, which a different estate in land to the landlord's freehold estate. The leasehold estate is a legal estate of which the tenant is the owner.

Her Honour held [at 11] that a disclaimer by the liquidator would only terminate the rights, interests, liabilities and property of the landlord but would not bring the lease to an end for all purposes.  The tenant's proprietary interest in the land would not be brought to an end but would continue to subsist.

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