My Landlord is in Liquidation. What Happens to a Tenant Under a Commercial Lease?

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Table of Contents

• Background
• The Willmott Case Decision
• Key Take Aways for Tenants  

For most tenants, the hardest part of commercial leasing is striking a deal and entering into the lease. Most tenants think that they can then focus on building up their business, ensuring they pay the rent and maintaining the premises. In most cases this is true and for the majority of tenants, a commercial lease is trouble free. But what happens if your landlord (in the case of a limited liability company) goes into liquidation?

Is the tenant’s interest under the commercial lease protected in the circumstances? The short answer is the tenant’s lease could be in jeopardy.

This was the subject of a December 2013 High Court decision in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) & Ors [2013] HCA 514 (the Willmott Case).

Background

Willmott Forests (Forests) leased a number of properties (Properties) to Willmott Growers Group (Growers).

The Growers grew trees on the Properties to harvest for money as part of a scheme. However, the payment to Forests by Growers was dependent on the money from the tree harvest.

Forests suffered money troubles and went broke before the money from the tree harvest was paid to them by Growers. Consequently, Forests went into liquidation, with a liquidator being appointed.

The liquidator of Forests subsequently tried to sell the Properties leased to the Growers. However, the only offers made to purchase the Properties were from people/ organisations who wished to purchase the Properties without the lease to Growers.

In response to this, the Liquidators were of the view that they needed to disclaim the leases to Growers and took steps to do so.

The Growers disputed that the leases could be disclaimed and the matters ended up at first instance in the Supreme Court of Victoria, before being appealed in the Victorian Court of Appeal and ultimately the High Court of Australia.

The Willmott Case Decision

 The Victorian Court of Appeal (with the High Court subsequently upholding their decision) held that:

1. the liquidator was within its rights to disclaim the lease on the basis that section 568(1A) of the Corporations Act 2001 (Cth) provided the Liquidator with the power to disclaim leases (in certain circumstances) and;
2. once a lease is disclaimed the tenant’s rights under the lease are at an end and the tenant must vacate the property.

Key Take Aways for Tenants  

This decision is positive for liquidators and creditors of lessor companies in liquidation but concerning for tenants.

It effectively means a tenant’s lease could be at an end without any recourse for compensation.

Given the cost of Fitout and lease establishment for some tenants it may prove to be financially destroying for some tenants, forcing them into bankruptcy or liquidation.

If, as a tenant, you receive a disclaimer notice from a liquidator (Disclaimer Notice) you should seek legal advice immediately as it may be necessary to make a court application within strict time limits after you have received the Disclaimer Notice.

To successfully fight a Disclaimer Notice a tenant can either:

1. apply within the specified time to the court to show that the tenant will suffer damage or prejudice out of proportion to the damage or prejudice the creditors of the liquidated company will suffer if the lease is not set aside; or

2. bring an action under section 568D(2) of the Corporations Act to provide its loss as a creditor of the Lessor company – however, if there are no funds available or a long line of other Creditors this may not be an ideal course to take.

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If your landlord has gone broke or is in financial trouble, get in touch with LegalVision’s specialist commercial leasing lawyers or dispute resolution lawyers today on 1300 544 755.