How to handle a breach of a commercial lease.

Seeking the help of commercial property lawyers is an important step in handling any breach of a commercial lease. We’ve written this guide to help landlords understand their rights and obligations when it comes to how to evict a commercial tenant or deal with tenant rent defaults.

Unfortunately, many landlords will experience difficult tenants: rent defaults, or not complying with other obligations under a commercial lease is more common than people expect. These landlords will find that they need to take action in order to deal with the default and to mitigate their losses.

If you’re a landlord and you don’t follow the legal procedure, the tenant may end up taking legal action against you. The law is very specific about how a landlord must act when it seeks to enforce its rights against a tenant, and gives tenants opportunities to counterclaim where procedures aren’t properly followed.

Landlords, before you enforce a commercial lockout, or issue a commercial eviction notice, it’s incredibly important that you follow correct legal procedure when dealing with a defaulting tenant.

Know your commercial landlord rights, but also your commercial lease obligations as a landlord too. Commercial property lawyers are experts in protecting the rights of landlords, and can help advise on how to evict a commercial tenant, or how to otherwise handle a breach of a commercial lease correctly in the eyes of the law.

If you find yourself in a situation where you need to deal with a defaulting tenant or breach of commercial lease, there are a number of procedures to take into consideration:

1. Identifying the breach of the commercial lease
2. Serving a notice to remedy breach
3. Distraining goods in the premises
4. Re-entry of premise
5. Court action against a tenant
6. Other remedies available to a landlord

Here’s how to handle a breach of a commercial lease:

Identify the breach of the commercial lease

The first step is to identify the clause of the lease that a tenant has breached. It’s often the case that a tenant’s rent default comes down to failing to pay rent when required under the lease. In almost all cases, a lease will contain a covenant that the tenant must pay the rent and set out when it must be paid.

Under the Real Property Act 1886 (RPA), there is an implied term that a tenant must:

“Pay the rent thereby reserved at the times therein mentioned, and all rates and taxes which may be payable in respect of the demised property, during the continuance of the lease”

You’ll need to identify which clause has been breached, so you can then serve a notice on a tenant requiring them to remedy that breach.

Serve a notice to remedy the breach of the commercial lease

Once the clause has been identified, the next step is to serve a formal notice on a tenant requiring it to remedy that breach.

This notice must be served in accordance with the lease requirements in respect of the provisions on default and service of notices. If a landlord wishes to exercise its right of re-entry, then the notice procedure must comply with section 10 of the Landlord and Tenant Act 1936 (LTA).

Section 10 of the LTA states that:

“A right of re-entry or forfeiture under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease shall not be enforceable by action or otherwise, unless and until—

(a) the lessor serves on the lessee a notice specifying the particular breach complained of, and, if the breach is capable of remedy, requiring the lessee to remedy the breach, and in any case requiring the lessee to make compensation in money for the breach; and

(b) the lessee fails within a reasonable time thereafter to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money to the satisfaction of the lessor for the breach.”

It’s implicit in section 10 that the notice requiring a tenant to remedy the breach of the commercial lease should also specify (if it’s the case) that a landlord proposes to re-enter and take possession of the premises if the breach isn’t remedied.

A landlord must give a tenant a reasonable time to remedy a breach of a commercial lease. In most cases, 14 days will be sufficient, but what is a “reasonable time” is determined on a case by case basis, having regard to the amount involved and the background. Some breaches (e.g. carrying out any outstanding works in the premises) may require a longer period of time to remedy.

There isn’t a prescribed form for the notice, but it must be drafted in a manner that complies with section 10 and the requirements of common law, so make sure you get experienced commercial property lawyers to draft the notice for you. The notice must:

• be in writing;
• identify the parties, the lease and other particulars relevant to the lease;
• specify the breach with sufficient particulars, including setting out the clause of the lease that the tenant is in breach of, the amount of unpaid rent or other monies, and the date that such monies were due;
• require the tenant to remedy the breach, if it is capable of remedy;
• require that breach to be remedied within a specified time-frame (which must be a reasonable time) and in any case, require the tenant to pay compensation for the breach;
• disclose that if the breach is not remedied within the specified time-frame, then the landlord intends to re-enter and take possession of the premises; and
• be signed and dated by the landlord or a solicitor on its behalf.

The notice must be accurate (in both substance and form) and served on the tenant in accordance with the requirements of the lease.

If these requirements aren’t complied with, then a subsequent re-entry by a landlord may be invalid and unlawful. A notice which doesn’t comply with these requirements may have to be reissued to the tenant.

As commercial property lawyers, Johnston Withers Lawyers help landlords with queries about the length of the notice period and preparation of the notice. We understand all angles of commercial leases, landlord obligations, and commercial landlord rights. If you need help dealing with a tenant rent default situation, get in touch today; we’ll help you handle it the right way.

Distraining goods in the premises

Commercial landlord rights include a right to distrain goods in premises for outstanding rent, meaning landlords (or a person lawfully authorised by the landlord) are entitled to enter the premises, seize goods on the premises and sell them by public auction for the best price that can be obtained, in order to satisfy any outstanding rent obligations.

The procedure is governed by the LTA. Under section 125 of the RPA, it’s implied in every lease that the landlord has the “power to distrain according to law”.

Distraining goods can be a powerful self-help remedy for landlords to recover outstanding rent without the need for court action. It also allows the landlord to recover costs associated with the distraining of the goods, including legal, bailiff, locksmith and auctioneer costs and expenses.

There are various documents associated with distraining goods which must be displayed on the premises. We can assist with the preparation of these documents for you and your bailiff. As commercial property lawyers, we can also recommend reputable and reliable bailiffs who regularly deal with distraining goods.

In an earlier article, we discussed the procedure and the right to distrain goods for unpaid rent in commercial leases, but to summarise, there are a number of important points to consider when it comes to exercising this right:

• the right can’t be exercised after the lease has been terminated or expired;

• the right only applies to unpaid rent. It doesn’t extend to outgoings, GST or other amounts due and payable by a tenant under a lease; and

• all goods in the premises may be distrained. Exceptions to this include: goods belonging to a third party; clothes, tools and implements of trade; household items to the total value of $20.00; and records of a health practitioner.

There may be serious consequences for landlords who don’t comply with the procedure set out in the LTA. For example, if a landlord distrains and sells goods when no rent was due and owing, then the owner of the goods may take legal action against the landlord to recover double the value of the goods sold as well as legal costs.

Once the distress is levied (i.e. when the bailiff has visited the debtor with the intention to impound the goods) then the tenant is unable to use any goods in the premises or to trade from the premises. Distraining can sometimes be an effective tool to achieve a quick resolution without the need to exhaust the procedures available under the LTA. If a tenant pays the outstanding rent before the sale of the goods, the landlord can withdraw the Warrant to Distrain and allow the tenant to return to the premises to continue to trade.

Re-entry of premises

A lease should contain a clause on a landlord’s right to re-enter the premises following a breach of the commercial lease by a tenant.

The LTA spells out exactly what conditions landlords must comply with before re-entering. Here’s a few things to note:

• If the lease allows for a landlord to exercise a right of re-entry following a breach of the lease, and the landlord has followed the appropriate steps (discussed above) regarding serving a notice of the breach, and the tenant fails to remedy the breach within a reasonable time, the landlord can then re-enter and take possession of the premises.
• If the lease doesn’t contain a clause on a landlord’s right of re-entry, under the RPA there is an implied exception in the RPA if rent is in arrears for 3 months – but talk to us before taking action to get advice tailored to your situation.
• The most frequent method of actually re-entering involves a landlord (or a person lawfully authorised by a landlord) physically entering the premises, advising the tenant that the re-entry has occurred and serving a notice of re-entry on the tenant. Once a re-entry has occurred, the lease is immediately terminated.

It’s critical that a landlord has complied with the provisions relating to notices and re-entry. A tenant may be entitled to relief against forfeiture under the LTA if a re-entry and purported termination by a landlord is invalid and unlawful. A landlord’s unlawful termination may be a repudiation of the lease, which a tenant may accept and elect to terminate the lease and then sue the landlord for damages.

Court action against a tenant

A landlord may take legal action against a tenant to recover damages for its losses suffered due to the breach of a commercial lease.

The provisions of the lease may allow for a landlord to recover specific damages or compensation in respect of the breach, including:

the outstanding rent and any future loss of rent;

the costs incurred by a landlord due to the breach, including legal fees; and

unpaid interest on outstanding rent.

Landlords have a duty to mitigate their loss in relation to damages for future loss of rent in respect of the balance of the lease term. Generally, this means you need to take all reasonable action to find a replacement tenant as soon as possible.

If a landlord successfully obtains judgement against a tenant, there are a number of Court orders that may be available to facilitate the repayment of the debt, including a Warrant for Sale and Charging Order over a tenant’s real property (if any).

Before taking legal action against a tenant, it’s strongly advised that a landlord obtains legal advice from commercial property lawyers. South Australian landlords and businesses have trusted Johnston Withers with their commercial property matters for over 75 years, so you know we have the experience to help handle breaches of commercial leases as efficiently and effectively as possible.

Other remedies available to landlords

A landlord may have other remedies available to it depending on the terms of the lease. These include:

Director’s Personal Guarantee

If the tenant is a company and its director(s) signed a deed of guarantee as part of the lease, then a landlord may issue a notice on demand on the guarantor for payment of outstanding rent or other monies due to the landlord. The guarantor will be personally liable to pay the tenant’s debt to the landlord. A landlord may take court action against the guarantor to recover damages for its losses suffered due to the tenant’s breach.

Bank Guarantee

If a bank guarantee has been provided by a tenant to a landlord pursuant to the terms of the lease then in the event of a breach by the tenant, the landlord may present it to the bank to recover its losses due to the tenant’s breach. A lease should make provision for a replacement bank guarantee or a ‘top up’ any amount that the landlord has used.

Charge

A landlord may be entitled to have an equitable charge over any real property of a tenant or a guarantor as security for payment of the rent and other monies owing under the lease. This charge may be secured by way of a caveat over any interest in land owned by a tenant or guarantor in relation to the charge granted.

A landlord may also be entitled to register a security interest on the Personal Property Securities Register (PPSR). A PPSR security interest will attach to personal property owned by the tenant. This will allow a landlord to charge the personal property as security for payment of the rent and other monies owing under the lease.

The Personal Property Securities Act 2009 entitles a landlord to seize goods (collateral) if a tenant is in default under the lease. Section 123(1) states: “A secured party may seize collateral, by any method permitted by law, if the debtor is in default under the security agreement.”

A PPSR charging clause can be included in the lease in respect of a tenant’s personal property or in a deed of guarantee in respect of a guarantor’s personal property.

Lease clauses

A well-drawn lease should contain provisions dealing with defaults and a landlord’s rights in the event of a tenant’s default (this is why it’s always important to get specialist commercial property lawyers to draw up a commercial lease). These provisions should be detailed and comprehensive for the landlord’s protection. A lease should include clauses setting out:

• events of default by a tenant, including non-payment of rent;
• a landlord’s remedies in respect of an event of default, including a right of re-entry and termination;
• a right for the landlord to charge interest at a default rate on any outstanding rent or other monies due;
• a tenant’s obligation to pay or reimburse a landlord for its costs and fees arising from any re-entry, termination, or the recovery of any outstanding money; and
• a tenant’s obligation to compensate a landlord in damages for any breach, re-entry or early termination or repudiation by a tenant, including damages for future loss of rent.

Are you a tenant facing a commercial lockout, or you believe you’ve been served a commercial eviction notice unfairly? Get help understanding your rights and obligations under South Australian law sooner rather than later – send us a message today.

Remember, it’s important for landlords to follow the correct procedure when dealing with a defaulting tenant

Landlords need to ensure that all procedures carried out by it or on its behalf comply with all legal requirements, because an improper procedure may give a tenant cause to dispute the validity of the procedure and take legal action against the landlord. That’s why we always advise landlords to get tailored legal advice on how to handle a breach of a commercial lease, and on how to evict a commercial tenant.

Johnston Withers Lawyers are the commercial property lawyers Adelaide and regional South Australia landlords trust to protect their rights and help them understand their obligations under the law. We have extensive experience acting for landlords in all aspects of commercial leases, including recovering debts from a tenant and issuing commercial eviction notices.

If you need assistance resolving any lease dispute or breach of commercial lease, please contact Andrew Mitchard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.