King & Wood Mallesons

Asia-Pacific 100 position: 3

High Court decides: liquidators of insolvent landlords can disclaim leases with the effect of extinguishing the tenant’s leasehold interest

In a decision handed down in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers appointed) (in liquidation) [2013] HCA 51, the majority of the High Court upheld the Victorian Court of Appeal’s conclusion that the liquidators of an insolvent landlord can disclaim a lease, thereby extinguishing the tenant’s leasehold interest.

This decision has clarified the situation for liquidators: leases can be disclaimed with full effect, so that the land can be sold or dealt with unencumbered by the tenant’s interest. However, it raises some difficult questions for tenants, particularly tenants with long-term leases, as it reduces certainty if the lease can later be disclaimed and it may also affect the ability of a tenant to raise finance using a long-term lease as security.

In most instances, it will be more beneficial for the landlord’s creditors for the liquidator to sell/deal with the land on a ‘subject to lease’ basis: but where it is not, then tenants are at risk of having their leases extinguished. A tenant can challenge the disclaimer in court, but if this is not successful, their only remedy is to be treated as a creditor in the liquidation for the losses arising as a result of the disclaimer…

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