Terminating Leases by Landlords

Termination of leases can be a complex minefield from both a practical and legal perspective. It has not been made easier by the Courts finding that ordinary contractual principles apply to leases, including principles dealing with termination for repudiation or fundamental breach and breach of an essential term.

In the current economic climate there is even more reason to be resolute in managing tenant defaults in order to secure a constant income stream.

Potential Traps for Landlords

Example 1

The Supreme Court Case of Dee-Tech Pty Limited & Anor v Neddam Holdings Pty Limited has highlighted the need to ensure that termination of a lease by notice is done in no uncertain terms, to ensure "an unequivocal act or statement that the innocent party is treating the contract as at an end".

In this case, the managing agent for the landlord sent a Notice of Breach of Covenant to the lessee in compliance with the Statutory requirements, for failing to insure the premises.

Under the lease this was an essential term, which upon breach entitled the lessor to terminate. Almost four weeks later, the lessor's managing agent then sent a Notice to Vacate to the lessee, not for having failed to insure the premises, but for the failure to pay rent.

The notice advised that the Agent had been requested to terminate the current lease by the lessor, and that the lessee had to vacate the premises by a particular date BUT it did not seek immediate possession.

When the dispute between the lessor and lessee came before the Court, it was found that the Notice to Vacate failed to terminate the lease. The Court made this finding on the basis that the Notice, amongst other things, did not say the lease was terminated and did not terminate the lease immediately, anddid not contain a demand for immediate possession.

Example 2

In the case of Keswick Developments Pty Ltd & Anor v Kevroy Pty Ltd & Ors, the Court found that a failure to pay rent and maintain public liability insurance was not deemed to be a repudiation of the lease.

In this case where there was no specific right to terminate, repudiatory conduct of a lease must be of a serious nature, and one must look at all the circumstances, in order to determine if the Lease has been repudiated.

Examples of repudiatory conduct include:

  1. Abandonment of the premises;
  2. Abandonment of premises including a failure to pay rent and other covenant breaches;
  3. Gross breaches of covenant for quiet enjoyment.

Landlord Tricks

A Landlord can elect NOT to terminate a lease, as a lease is not terminated unless the Landlord elects to treat the repudiation as a repudiation of the lease. A Landlord cannot be coerced to make such a decision or to act reasonably.

A Landlord, at their option, can therefore keep the lease on foot. If a Landlord elects to keep a lease on foot then at Law there is no duty to mitigate. In practice this means that even if a tenant is able to find a new tenant to take over the lease, the Landlord is still able to keep the lease on foot and sue for unpaid rent as it continues to fall due.

Points to Remember

  1. With Managing Agents increasingly taking on the role of liaison, or relationship manager, between the Landlord and Tenant, it is important that Landlords keep in mind their legal obligations and look to experienced lawyers when it comes to drafting important documents;
  2. It is important to seek professional legal advice on the circumstances surrounding a breach of the Lease, prior to taking action to terminate;
  3. Landlords are under no obligation to elect to terminate a Lease and as such to mitigate any loss.

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.