Commercial leases - landlords’ remedies [March 2010]

Tenants paying their rent late?

In the current economic climate it is not uncommon for a tenant to breach their lease by not paying their rent on time, if at all. Landlords may find that they are having to follow up with phone calls and letters each month and may look to terminate the lease if the tenant continues to not pay the rent.

What has changed?

Many leases entered into prior to 1 January 2008 contain a term allowing the landlord to re-enter the premises and terminate the lease if the rent is in arrears for 14 days or more. Previously the landlord could take possession of the premises without notice, sue the tenants or take steps to resort to the tenant's chattels to pay for rent arrears.

The Property Law Act 2007 ("the Act") has now abolished the right of "distraint" and has also tightened up the process for terminating the lease for unpaid rent. While the right to terminate a lease for arrears in rent and/or other breaches of the lease by the tenant still exists, the Act sets out new procedures to be strictly followed before the lease can be cancelled.

What must be done now?

As soon as the tenant has failed to pay rent, the landlord can issue notice, but must give the tenant at least 10 working days notice of the landlord's intention to cancel the lease unless the arrears are paid. The landlord can only cancel if the rent is at least 10 working days overdue and the 10 working days notice period has expired. Theoretically if a landlord is quick off the mark, the rental arrears period and the notice period could be in tandem. But in practice the notice expiry date will be later.

The Act requires the following to be included in a notice to the tenant:

• the nature and extent of the breach (e.g. non-payment of rent);
• the amount to be paid or things that must be done to remedy the situation;
• the time period in which the amount must be paid to clear the breach;
• that the landlord may cancel the lease if the breach is not remedied within the time period; and
• the tenant's right to apply to the court for relief against cancellation and that the tenant should seek legal advice.

If after receiving the notice the tenant does not pay the amount owing within the time specified then the landlord can apply to the court for possession of the property. Alternatively, and more effectively, the landlord will generally elect to re-enter the premises "peaceably" to cancel the lease.

A tenant, instead of facing being locked out without notice as could happen prior to the new Act, is now entitled to advance notice of such outcome. The landlord is able to give notice of the breach as soon as it is discovered that the rent is overdue and may cancel the lease if the rent remains unpaid as at the expiry of the notice. If the landlord cancels the lease correctly, the tenant will still be liable to the landlord for damages.

Recommendations

The landlord should serve a notice on the tenant as soon as the rent is overdue because the notice period can start running prior to the date on which the rent will have been in arrears for 10 working days. The notice requires careful drafting to ensure that it does not expire prior to the arrears period and that it meets the other requirements of the Act.

Previously, landlords had a right of distraint allowing them to enter the premises and take the tenant's goods if the rent had not been paid. Landlords need to be aware that they no longer have this right (which was seldom carried out anyway) even if the lease has a term allowing it. The provisions of the new Act override any provision allowing distraint.

Landlords should obtain legal advice prior to taking any steps to serve a notice on a tenant, re-enter the property or cancel the lease.

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