A tenant goes into liquidation. A week or two later the landlord gets a letter from the liquidator saying the lease has been disclaimed. The landlord wants to know three things: can the liquidator do that, will anyone still pay the rent, and does the director’s personal guarantee still stand?
The short answers are: yes, if the lease is “onerous property”; sometimes; and yes.
Liquidation does not, of itself, end a lease. Unless the lease says otherwise, it carries on until someone brings it to an end. Section 269 of the Companies Act 1993 gives the liquidator a way to do that. It allows a liquidator to disclaim onerous property: broadly, contracts and property that are a burden on the liquidation or cannot usefully be realised. It is a useful tool for liquidators, and it has real consequences for whoever is on the other side of the contract.
What counts as onerous property
Section 269 defines onerous property as:
- an unprofitable contract;
- property of the company that is unsaleable, not readily saleable, or that may give rise to a liability to pay money or perform an onerous act; or
- a litigation right that, in the liquidator’s opinion, has no reasonable prospect of success or cannot reasonably be funded from the company’s assets.
Leases are the most familiar example, but the power reaches further. In Re CWF Holdings Ltd (in liq), liquidators disclaimed forestry agreements that committed the company to paying annual fees until the trees were harvested in 2048, and the High Court refused the other party leave to challenge that decision. In Smith v Southern Builders Ltd (in liq), discussed below, the disclaimed property was land worth about half the debt secured over it.
“Unprofitable” is narrower than it sounds. A contract is not unprofitable just because it is a bad deal, or because the company could have negotiated a better one. The principles the High Court adopted in the forestry case, taken from an Australian decision, ask whether the contract imposes continuing financial obligations that are detrimental to creditors, with no sufficient benefit in return, or whether performing it would drag out the liquidation and involve spending that may not be recovered. A lease with years left to run, on premises the company no longer trades from, is a typical example.
A liquidator can disclaim even after taking possession of the property, trying to sell it, or otherwise exercising rights of ownership over it. What a liquidator cannot do is disclaim part of the property and keep the rest. It is all or nothing.
What a disclaimer actually does
From the date of the disclaimer, the company’s rights, interests and liabilities in the property come to an end. Rent that fell due before then is still owed, as a claim in the liquidation. The liquidator must give written notice of the disclaimer, within 10 working days, to everyone they know is affected.
The important limit is in section 269(3)(b). A disclaimer does not affect anyone else’s rights or liabilities, except so far as that is needed to release the company. That qualification does a lot of work:
- A guarantor of the lease stays liable, as though the lease had not been disclaimed. In Drake City Ltd v Tasman-Jones the High Court adopted that approach, taken from the leading English case. For many landlords the director’s personal guarantee is where the real recovery lies.
- If the company took the lease by assignment, any liability the original tenant still has to the landlord is unaffected.
- A mortgage over disclaimed land stays attached to the land. The company’s interest passes to the Crown, but subject to the mortgage.
Where the landlord ranks
A landlord of a company in liquidation can end up with three different claims, and they rank very differently.
Rent the company owes is an ordinary unsecured claim, unless the landlord holds security.
The exception is where the liquidator keeps using the premises for the liquidation, say to keep trading while the business is marketed, or to store plant until it is sold. Rent for that period is likely to be treated as an expense of the liquidation, which would put it ahead of employees, Inland Revenue and every unsecured creditor.
Once the lease is disclaimed, the landlord can claim as a creditor for the loss the disclaimer causes. That is not simply the rent for the rest of the term. The landlord has the premises back and can re-let them, and the claim is being made now rather than over several years. In Lewis Holdings Ltd v Steel & Tube Holdings Ltd the High Court, following the House of Lords, took as its starting point the rent the landlord would have received for the rest of the term, less what it could get by re-letting on similar terms, discounted for early payment. The claim is unsecured.
Take a café with four years left on a lease at $60,000 a year. The liquidator trades for three weeks while trying to sell the business, the sale falls over, and the lease is disclaimed. Rent owing at the date of liquidation is an unsecured claim. Rent for the three weeks is likely to be a liquidation expense. The claim for the rest of the term starts at $240,000 on paper. But if comparable premises nearby would usually re-let within about six months at a similar rent, the claim is likely to be a fraction of that. The director’s guarantee, meanwhile, survives the disclaimer.
Forcing the liquidator to decide
Section 269 sets no deadline, so a liquidator can take time to decide whether to disclaim. For a landlord trying to plan, that uncertainty is a problem.
Section 270 deals with it. Anyone whose rights would be affected by a disclaimer can give the liquidator written notice requiring a decision by a stated date, which must be at least 20 working days after the liquidator receives the notice. If the liquidator has not disclaimed by then, they lose the right to disclaim that property.
This is the counterpart to the notice a liquidator can give a secured creditor under section 305, which we covered in Use it or lose it: secured creditors and section 305. That notice also runs on 20 working days.
Vesting orders and challenges
Someone who suffers loss because of a disclaimer can also ask the court to vest the disclaimed property in them. The court may make that order if it is satisfied it is just. In Smith v Southern Builders Ltd (in liq), with the land now sitting with the Crown, enforcing the mortgage had become difficult and complicated. The court vested the land in the mortgagees, on condition that they sell it promptly, so that a sale they had lined up could go ahead.
A liquidator’s decision to disclaim can also be challenged under section 284, which lets the court confirm, reverse or modify a liquidator’s decisions. Anyone other than the liquidator or a liquidation committee needs the court’s leave to apply.
Receivers and administrators
Section 269 is a liquidator’s power. Receivers and voluntary administrators deal with leases under different rules, which turn on when they become personally liable for rent. We covered those in Personal liabilities of Liquidators, Receivers and Administrators.
If you are the landlord
Start with the guarantee. Take advice before you retake possession or re-let, because that can affect what the guarantor owes for the period afterwards. Ask the liquidator early, in writing, whether they intend to use the premises and for how long, because rent for that period is likely to rank ahead of the unsecured creditors. If you need certainty, a section 270 notice will give it to you. And once the lease is disclaimed, file a claim that reflects your actual loss, allowing for re-letting and early payment, rather than a claim for every dollar of rent left on the lease. A properly calculated claim is harder for a liquidator to reject.
If you have any questions or enquiries, please do not hesitate to contact the team at Waterstone. To get in touch with our team, please contact us at reception@waterstone.co.nz or call 0800 256 733.
