In Willmott Growers Group v Willmott Forests (“the Willmott case”) the High Court has confirmed that a liquidator can disclaim a lease if a landlord company is liquidated.
Facts of the case
- Willmott Group (“Willmott”) leased land to a tenant for a period of 25 years.
- Willmott subsequently became insolvent and was wound up.
- Willmott’s liquidators disclaimed the lease in accordance with the Corporations Act (“the Act”).
The High Court found that the liquidator was entitled to disclaim the lease.
The tenant lost its rights in regards to the land and was left only with a claim as an unsecured creditor in the liquidation.
Effect of Willmott on tenants
- Tenants may be disadvantaged if their landlord enters into liquidation;
- Banks may be reluctant to hold leases as security due to the potential for leases to be disclaimed, resulting in it being more difficult for a tenant to obtain finance;
- Tenants may lose the benefit of certain assets brought onto leased land if such assets cannot be relocated when a lease comes to an abrupt end (i.e. the Willmott case involved the planting of trees on the leased land which the tenant lost the benefit of when the lease was disclaimed).
Possible Solutions for tenants
Unfortunately, there is nothing tenants can do to prevent their landlord from being wound up and, should this occur, a liquidator can disclaim a lease. With that said, it may be beneficial to creditors for a liquidator to keep a tenant in place.
Some possible safeguards available to tenants include:-
- Negotiating a condition of the lease by which the landlord grants a registerable mortgage over the land to the tenant to secure payment of damages if the lease is ever disclaimed. This would ensure that tenants have priority as secured creditors in a liquidation scenario.
- Including a clause in the lease to the effect that title in any property, fixtures or fittings bought on to the land by the tenant will not pass until the landlord has paid the tenant the market value for such property, fixtures or fittings. Registration of a security interest on the Personal Property Securities Register may also be necessary.
- Obtaining personal guarantees from the director/s of the landlord company.
It is worth noting that section 568B(3) of the Act allows the Court to set aside a disclaimer of lease “if satisfied that the disclaimer would cause, to persons who have… interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors.” This section was not argued in the Willmott case but is an avenue available to be utilised by tenants in future cases.
For assistance in relation to your leasing issue, please contact the experienced team at Everingham Solomons, because Helping You Is Our Business.