Tenant’s default and Landlord’s right of re-entry under the Retail Leases Act 2003 (Vic)

The single biggest issue faced by Landlords when dealing with recalcitrant Tenants who aren’t keeping up their end of the bargain is, how do we get rid of them?

Bringing a lease to an end and re-entering possession

The most common factor which damages relationships between Landlords and their Tenants is a failure on the Tenant’s part to keep up to date with the rent and outgoings payable to the Landlord under the terms of the lease. While Landlords are often patient because they wish to avoid the time and expense of re-leasing premises there comes a point where all Landlords have to say enough is enough.

At this stage the most important thing to do is to consider the terms of the lease. Whatever the breach of the lease might be it must activate a right of re-entry or termination under the terms of the lease. Certainly, it would be unusual if a professionally drafted lease didn’t confer such a right for non-payment of rent, but it isn’t uncommon where the lease in question hasn’t been drafted professionally or in situations where there is no written lease at all.

In normal circumstances where the terms of the lease provide sufficient re-entry rights the usual step would be to issue a Letter of Demand. If the demand to pay the debt is not met, the next step would be to ensure the tenant is given proper notice in accordance with s. 146 of the Property Law Act 1958 (Vic). It is important to ensure the notice strictly complies with the law because a defective notice could render any subsequent re-entry unlawful. Generally speaking, the notice should provide the Tenant the opportunity to remedy the breach of the lease and advise them of the consequences of failing to do so.

Formalities - Section 146 prescribes requirements for the notice which must:

• Set out, specifically, the breach/es in issue
• Identify that the breaches must be remedied (if possible) or compensation is required to be paid to avoid the lease being forfeited
• Afford a reasonable time for compliance (14 days or more)
• Provide sufficient level of detail (e.g., can the Tenant reasonably understand the breaches complained of and what would be an adequate response to address these).

Purpose of Notice

The purpose of a notice is to give the tenant an opportunity to consider its position and give a response. As to what is a “reasonable time” for the lessee to respond to a statutory notice, Judd J in Primary RE Limited v Great Southern Property Holdings Limited [2011] VSC 242 said at [140] that this “depends upon the purpose for which the notice is given, the nature of the breaches alleged and what is required to be done to avoid forfeiture”. A reasonable time is not the time necessary to actually undertake the work.”

If the breach is not remedied the Landlord must then make an unequivocal demand for possession of the property.

The Landlord can do this by:

• Serving a notice of re-entry (prior to physically re-entering the premises)
• Physically re-entering the premises (and changing the locks); or
• Issuing proceedings seeking possession of the premises.

Seeking a court order would allow the Landlord to avail itself of the services of the Sheriff's Office Victoria and also ensure that the subsequent re-entry is lawful. Where the Retail Leases apply, the Landlord must also consider s. 87 of the Retail Leases Act 2003 (Vic) which requires that any dispute must first be referred to the Small Business Commissioner before taking possession by re-entry.

After termination

After termination, the lease is at an end. The Tenant effectively becomes a trespasser but has a right to a reasonable opportunity to remove goods from the premises.

The Landlord is entitled to exclusive possession of the premises; has a potential claim for loss and damage as a result of breaches or repudiation to the extent to which it mitigates its loss; and has a duty to care for the Tenant’s goods (subject to the terms in the lease).

Risks of unlawful re-entry

If an eviction proceeds unlawfully by reason of a failure to give proper notice (which includes giving a notice which is for some reason defective) or any other reason, the Landlord may become liable to the Tenant for any damage (including potentially, loss of profit) the Tenant may suffer because of the re-entry. A failure to re-enter lawfully can have significant and adverse financial consequences for the Landlord.

Relief against forfeiture

Relief against forfeiture (as the name implies) is where a lease has been forfeited and the Landlord has re-entered the leased premises, due to a tenant’s breach of a term of the lease, but a Court makes orders that reinstate the lease and enable the Tenant to return to the occupation of the premises.

Relief against forfeiture is not dependent upon any error or failure on the part of the Landlord to properly act.  The Landlord may act completely in accordance with the lease and the Landlord's contractual rights to forfeit the lease and re-enter the premises, but the Tenant may nevertheless be granted relief against forfeiture.  

The Tenant can:

• Make an application to either the VCAT or the Court
• Either pay rental arrears or show that it can rectify the defaults (other than payment of rent).

To defend a claim, the Landlord must generally show that the Tenant is insolvent or unable to comply with the terms of the lease. It is generally hard to defend against a first-offender Tenant.

What can the Landlord recover from the former Tenant?

• Rental arrears up until the date immediately before the date of termination of the lease (damages from breach of the lease covenant); and/or
• Rent that would have been payable from the date of termination to the expiry date of the lease (loss of bargain damages).

If you require assistance evicting a Tenant, we strongly recommend seeking legal advice in relation to your lease and the relevant legislation which may differ depending on the nature of your lease agreement.

Contact our Commercial leasing team on 03 9550 4600 if you have any questions about Tenant’s defaults.