Has your tenant breached the terms of their lease? Do you need to re-take possession of your property? Here is how to cancel your lease with the least amount of grief for either party
Cavell Leitch has recently acted for a commercial landlord whose tenant had breached their lease's terms. The breaches of the lease were so severe that the landlord wasn't left with any practical option other than to terminate the lease and re-take possession of the property.
Our client wanted to cancel the current lease quickly and with a minimum of fuss, but it was still important that the lease was properly terminated in accordance with the relevant statutory requirements. The landlord could have been faced with delays, a damages claim from their former tenant, or even criminal charges if the landlord had failed to follow the correct process.
The practical situation was complicated. The tenant had committed 3 separate breaches of the lease's terms. The tenant had fallen far behind in their rental and outgoings payments, the tenant had carried out unconsented building work to the premises, and the tenant occasionally resided on-site when such occupation was not permitted under the lease. Once the lease was terminated we needed to make sure that the upset tenant would actually vacate the property without damaging the property or hurting anyone else.
Step 1: Issuing a valid default notice
Our landlord needed to comply with the provisions of the Property Law Act 2007 (Act) when cancelling their commercial lease. It was firstly necessary to serve the tenant with an intention to cancel their lease. The notice had to set out how the lease been breached, and how the tenant was expected to remedy those breaches. By law the tenant must be given at least 10 working days to remedy the breaches. In our case the notice was served both on the tenant company as well as on the personal guarantors under the lease.
The form, content and service requirements for a lease cancellation notice are very strict, and a mistake could render the entire notice defective or expose the landlord to a damages claim. We therefore recommended that our landlord client instructed us to prepare the notice on their behalf. In this situation the lease provided that the landlord's legal costs were recoverable from the defaulting tenant, although this may not always be the case.
As the premises was located in a different city than where our landlord client was situated, we recommend that our client engaged a service agent to deliver the lease cancellation notice to the tenant. In our experience there are multiple benefits to engaging a service agent. The service agent was able to immediately confirm that the notice has been successfully served on the tenant, rather than the landlord having to rely on the notice successfully reaching the tenant by post. It also took some of the emotion out of the process as there was a concern that the upset tenant could have behaved unpredictably towards the landlord if they'd personally served the notice.
The lease cancellation notice would have also had to be served on any mortgagee or receiver of the tenant, any subtenant, or any mortgagee or receiver of the subtenant. In this particular case the lease wasn't mortgaged or subleased, but serving the notice on a mortgagee can sometime assist in securing payment of rental arrears as the tenant's bank may wish to protect its security interest.
Step 2: Entering into a dialogue with the tenant
Once the notice was served we entered into a dialogue with the tenant on the landlord's behalf to make it clear that our client expected the lease breaches to be remedied in full by the allotted deadlines. If the situation had been different a landlord could have alternatively used this period to agree on an acceptable payment plan for the unpaid arrears.
Step 3: Peaceably re-entering the leases premises
The lease cancellation notice then ran its course without the tenant remedying its lease breaches in full. The next step was to actually cancel the lease and retake possession and the landlord had 2 options in this regard. The landlord could have either apply to the court for an 'order for possession of the land', or the landlord could have 'peaceably' re-entered the property.
It is important to note that peaceably re-entering a premises is not entirely without its risks. A tenant has a right under the Act to apply to the courts for relief against the cancellation of their lease. The tenant would be able to make such an application within 3 months of the date the premises were peaceably re-entered, and the courts have a wide discretion in deciding whether or not relief is warranted. As a way of granting relief the courts can order that the lease is reinstated or award the tenant damages.
In our landlord's situation, however, applying for a court order wasn't a practical option. This would have been an expensive process, and our landlord client would have been faced with a delay until the matter came up in the court's timetable. It was important to the landlord that the premises started generating a rental income again as soon as possible. The landlord also made an informed decision that the chances of the tenant successfully applying for relief was unlikely in the circumstances.
Our client accordingly elected to re-enter the property 'peaceably'. In order to re-enter the property peaceably the provisions of section 91 of the Crimes Act had to be followed. The landlord could not enter the premises using force or in a way that would 'breach the peace', could not physically remove anyone from the premises, and could not unnecessarily damage the premises or the tenant's property.
In practice the procedure for peaceably re-entering a premises will vary depending on the particular circumstances. In some cases merely entering the premises and announcing the landlord has retaken possession will constitute re-entry. In other cases, the act of the landlord leasing the premises to another party would suffice. In our situation it was necessary to actually re-secure the premises by changing its locks.
Our client accordingly engaged the service agent to be attend the premises outside of the tenant's usual business hours with a locksmith who changed property's locks. This ensured that there was a greater chance that the tenant would not be present and attempt to forcibly prevent re-entry. Cavell Leitch prepared a notice of re-entry which was affixed to the front door explaining that the landlord has retaken possession of the premises. The notice of re-entry also set out that the tenant could contact a certain number to arrange the removal of any belongings which were now locked inside the building. A trespass notice was also prepared against the tenant, but this was thankfully not required in this case.
Step 4: following up on the outstanding debt
The lease was treated as being terminated as soon as the locks were peaceably changed. Our client contacted its former tenant and they entered into a binding written agreement which stated that the arrears would be partially discounted in return for the landlord taking ownership of certain aspects of the tenant's fit out, while they also agreed that the balance of the arrears could be repaid over a certain period.
This meant that the landlord was left with an undamaged and partially fitted out premises which could be re-leased relatively quickly, while the tenant was able to avoid debt recovery proceedings being immediately brought against the tenant company and the guarantors personally.
The landlord then provided the tenant with supervised access to the premises to remove the rest of their belongings.
Cancelling a lease is never a pleasant process, but it was important in this case that the process was followed properly so that our client could reassume possession of the premises with a minimum of fuss and cost. The initial process for preparing the notice of intention to cancel a lease may be identical in each case, but the method of serving the notice and then actually following through on taking back possession must be carefully considered depending on the specific circumstances.
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.