Disclaimer of a lease by a landlord update: Re Willmott Forests [2012] VSCA 202.

I wrote a post on disclaimer of a lease by a landlord in 'Disclaimer of a lease by a landlord: Willmott Forests Ltd [2012] VSC 29'. That matter was a decision by Davies J in which Her Honour held that a landlord could not disclaim a lease, under s568 Corporations Act, for the following reasons (at [11]):

a disclaimer of the lease by the liquidator of the landlord would only terminate the rights, interests, liabilities and property of the landlord but it would not bring the lease to an end for all purposes. Specifically, it would not bring the tenant’s proprietary interest in the land to an end. The tenant’s proprietary rights in the land will continue to subsist, even though the effect of disclaimer is that the landlord’s interests and liabilities under the lease have been terminated. Thus the effect of disclaimer is different where the lease is disclaimed by the liquidator of the landlord.

That decision was appealed, and the Court of Appeal (Warren CJ, Redlich JA and Sifris AJA) upheld the appeal in Re Willmott Forests [2012] VSCA 202. I haven't linked the AustLII decision to this page as the decision is not available yet. However the decision is available on the ABL website section devoted to the Willmott Forests liquidation litigation (http://www.abl.com.au/willmott/willmott.htm).

Warren CJ and Sifris AJA summarised the critical question as follows (at [1]): 'The critical question in this appeal is whether a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) ('the Act').'

The Court of Appeal considered that if the interest of a lessee under a disclaimed contract terminated, then the leasehold estate must also go.

Warren CJ and Sifris AJA construed s568D(1) Corporations Act widely and considered that it included the obligation to provide possession and quiet enjoyment (at [37]):

37. The context of the word 'liability' in s 568D(l) suggests that it should be given the widest possible meaning and include the obligation to provide possession and quiet enjoyment. The section is specifically designed to enable a liquidator 'to cease performing obligations ... [and] to achieve a release of the company in liquidation from its obligations'. If WFL is to be relieved of its obligation to provide quiet enjoyment, clearly and in context a liability, the interest of the lessee so far as tenure is concerned is directly related to and underpins such liability. The tenure must go. It is necessary to affect the Growers rights (tenure) in order to release WFL from its liability (possession and quiet enjoyment). The cases where rights have been preserved usually involve claims against third parties unrelated to any liability of the company in liquidation.

Warren CJ and Sifris AJA relied on the decision of Deane J in Progressive Mailing House Proprietary Limited v Tabali Proprietary Limited (1985) 157 CLR 17 (at [42] of Willmott):

[T]he leasehold estate cannot be divorced from its origins and basis in the law of contract (c.f. per Aitkin L.J. in Matthew v Curling): the lease should be seen as 'resting on covenant' (or contractual promise) and it is 'the contract ... and not the state ... which is the determining factor': see per Isaacs J., Frith v O'Halloran quoting from Hallen v Spaeth.
...
[O]nce it is accepted that the principles of the law of contract  governing termination for fundamental breach are, as a matter of theory, applicable to leases generally, there is no difficulty in applying them in the present case in much the same fashion as an ordinary executory contract: '[i]f the contract is avoided or dissolved ... the estate falls with it': per Lord Wright, Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd.

Warren CJ and Sifris AJA held that because the leasehold interest is governed by the law of contract, the consequences of disclaimer of a contract of lease were no different to those for termination of a lease by way of acceptance of a repudiation (at [47]):

47. Although the event bringing about the termination of the contract of lease (and as a consequence, any leasehold interest) was a repudiation accepted by the non-defaulting party, it is the consequences of such termination, (namely termination of the leasehold interest) however brought about, that are relevant. There is no reason in principle or policy that should treat the consequences of disclaiming a contract of lease in a different way. In both cases, the lease agreement is at an end and what follows is a matter of law, namely termination of the leasehold interest that does not depend in any way on the reason for such termination. 

Warren CJ and Sifris AJA held that the leasehold interest could not survive the termination of the very document that created it and regulated the tenure of the Grower, and held that the policy of the Corporations Act, particularly the disclaimer provisions, supported the appellant's position (at [58]):

58. Accordingly, in our opinion, the grounds of appeal are made out. For the reasons given, any leasehold interest cannot survive the termination of the very contract that created it and regulated the tenure of the Grower. It is this tenure which creates, and is the basis of, the obligation or liability on the part of WFL to provide quiet enjoyment. Section 586D(1) allows the liquidator to terminate this obligation or liability despite its intrusion into the property rights of an innocent party. The evident policy is to permit the loss of these rights in order to enable the company in liquidation to be free of obligations so that it can be wound up without delay for the benefit of its creditors. To compensate, the rights of the affected parties are transmuted into various statutory rights and claims.

Redlich JA also held that s568D ought to be construed widely (at [82]):

82. Save where the terms of the lease provide otherwise, the landlord will ordinarily be obliged to meet various expenses arising from ownership of the freehold to ensure the tenant's undisturbed possession of the land. But 'liability' in the context of s 568D is not to be confined to a financial obligation or immediate financial detriment. There is nothing in s 568D or Div 7 A to suggest that the term liability is not so wide as to include 'a legal obligation or duty.' The term 'liability' has a broad meaning which covers executory obligations in relation to the quiet possession, use and enjoyment of the land into the future. To release the appellants from these obligations it is necessary that the respondents' estates or interests in the leased lands be extinguished at the same time as the contracts.