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Liquidators of landlords can terminate leases

by Andrew Kleiman on July 8, 2014 No comments

Liquidators of insolvent landlord companies can terminate commercial leases on their property, evict the tenants and sell the land with vacant possession.

In what has become known as the ‘Willmott Growers’ case, the High Court held in December last year that a liquidator of an insolvent landlord company could disclaim (i.e. terminate) leases granted by the landlord. Before this case, the general view was that only the liquidators of an insolvent tenant could terminate the lease because the lease was the property of the tenant and not the landlord.

The consequences

It is bad news for tenants leasing from private/ proprietary companies who could be evicted if their landlord goes insolvent despite being up-to-date with the rent. It is also bad news for tenants and their financiers because the value of leasehold property as security for finance is reduced.

It is good news for creditors of insolvent landlords because liquidators now have a means to claw back land previously leased away under genuine, arms-length, commercial transactions. Previously the liquidator would have had to demonstrate the transaction was an unfair preference, uncommercial or fraudulent.  But, it would be prudent for a liquidator to seek the leave of the Court before exercising this power.

It is also good news for purchasers of land from liquidators who now have the possibility of buying such land with vacant possession.

Liquidator not receiver or manager

Tactically, secured creditors of an insolvent company who want to claw back land leased to tenants may wish to appoint a liquidator who can terminate the leases rather than a receiver or manager, who cannot.

When would a liquidator want to terminate a lease

A landlord’s liquidator will not often want to terminate leases generating market rental incomes.  But the motivation to terminate may arise if the land is more marketable without the leases.  For example, to an owner-occupier is prepared to pay a higher price than an investor or to a developer who needs vacant possession or – if the existing lease occupies only part of the site – to an investor who wants to lease the whole of the site.

What can the tenant do about it?

Not much other than making sure a tenant takes upfront any lease incentive, whether rent-free or fitout contribution. That way the incentive will have been received before any termination by a liquidator.

The High Court said a tenant whose lease is terminated can prove its loss as an unsecured creditor in the winding-up. Or the tenant can take legal proceedings to set aside the termination if they can demonstrate loss that is ‘grossly out of proportion’ to the prejudice to the company’s creditors.  We think that is a choice between joining the Hungry Mile and spinning the roulette wheel.

For those interested in the background to the case

Willmott Growers Group Inc v Willmott Forests Limited (Receivers And Managers Appointed) (In Liquidation) [2013] HCA 51.

The leases in Willmott Growers were part of one of those forestry investment schemes marketed as a tax-effective structure in which investors purchased 25 year leases with many paying the whole of their investment (dressed up as rental) in advance.  Significant income would not flow from the scheme until the trees were harvested in 16 to 25 years’ time.  The companies running the scheme went insolvent and the liquidator could not find anyone to take over the scheme.  So the liquidator had to get rid of the leases in order to realise the true market value of the land for the benefit of the creditors. The leases were not income producing and effectively sterilised the land.

The leases were not registered on the landlord’s title. The land in question was in Victoria where leases are not usually registered.  But there is nothing in the High Court’s judgment to suggest that the outcome would be any different if the land was in New South Wales and leases were registered on title.

Andrew Kleiman, Legal Practitioner Director

Andrew KleimanLiquidators of landlords can terminate leases