Major victory for tenants in landlord’s liquidation

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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Why no requirement for a s.146 notice?

I have had a number of queries about my last post in which I referred to N.C.Reid & Co v Pencarl Pty Ltd [2011] VCAT 2241 in which Judge O’Neill held that before re-entering leased premises the landlord did not have to serve a notice that complied with s.146 of the Property Law Act 1958. The lease permitted the landlord to re-enter if the guarantor became bankrupt.  Readers asked why s.146 did not apply? Section 146 requires service of a notice where a right of re-entry or forfeiture under any proviso or stipulation in a lease or otherwise arising by operation of law for “a breach of any covenant or condition in the lease, including a breach amounting to a repudiation”.  For s.146 to apply there must be a breach. The tenant argued that there had been  a repudiation. His Honour rejected the tenant’s argument and held that the re-entry took place by reason of a contractual right; there had not been a breach and therefore no notice was required.

No s.146 notice required for contractual right to terminate

Leases often provide that the landlord may re-enter premises and end the lease if a guarantor becomes bankrupt. In N.C.Reid & Co Pty Ltd v Pencarl Pty Ltd  [2011] VCAT2241 the guarantor became bankrupt, the landlord re-entered the premises and leased the premises to a new tenant. The existing tenant sought relief against forfeiture and/or damages. The tenant claimed, among other things, that the landlord should have served a notice under s.146 of the Property Law Act 1958 because the lease had been terminated “for repudiation” with the consequence that the tenant would have had 14 days to remedy the breach. The tenant’s claim was unsuccessful. Judge O’Neill held that the lease had been terminated pursuant to a contractual right and not because of a repudiation of the lease and therefore a notice that  complied with s.146 did not have to be served. His Honour also said that in if there were a breach it could not have been rectified.