10 minute read
The REIV Commercial Lease Code 143 Pages
Remedying a Default under the REIV Commercial Lease Code 143
A well-drafted commercial lease will have embedded provisions to address any tenant default (breach of covenant or condition in the lease) that may give rise to a right of re-entry or forfeiture including a breach amounting to repudiation.
It is important that property managers understand the terminology used to describe the effects of a default and the covenants of the lease that have been breached before contemplating any remedial action.
Common tenant defaults include: • Failure to pay rent and/or outgoings; • Failure to affect repairs or maintenance in accordance with the lease; • Any act of insolvency; • Ceasing to use the rented premises for its permitted use; • A change in control of the tenant’s organisation; • Unauthorised assignment of lease and sub-letting the premises; and • A breach of an essential term of the lease. Not all defaults threaten the rights of the tenant to remain in possession. For example, a tenant’s failure to replace part of the security deposit that is claimed by the landlord. Retail tenancy disputes are defined under ‘s.81’ of the Retail Leases Act 2003 (“Act”). Under ‘s.81(2)’ of the Act, a retail tenancy dispute does not include a dispute solely relating to the payment of rent, or a dispute that is capable of being determined by a specialist retail valuer under ‘s.34’, ‘s.35’ or ‘s.37’ of the Act.
With a regulated lease, such disputes must be resolved in accordance with Part 10 of the Act. Under ‘s.86’, a retail tenancy dispute must be referred to the Victorian Small Business Commissioner (“VSBC”) for alternative dispute resolution. If the matter is not resolved, it will be forwarded to the Victorian Civil & Administrative Tribunal (“VCAT”) for determination. Lack of good faith in attempting to resolve a dispute before the VSBC may result in a costs order at the VCAT.
Urgent matters such as injunctions may bypass the VSBC and proceed directly to the Tribunal.
Managing Estate Agents must be wary about delivering notices to tenants that warn of the consequences of not remedying a breach. Different notices have different outcomes, and the choice of notice is a specialised skill. It must be exercised with the clear understanding of what the landlord requires. Further, it is legal work that cannot be done by agents.
The REIV does not produce notice of breach forms, and even if such forms were available, an agent is prevented from charging a fee for their work. By charging a Lease Preparation Fee for completing the REIV Commercial Lease, an agent is engaging in legal practice as an unqualified entity and is in breach of ‘s.53A’ of the Estate Agents Act 1980, Part 2.1, Chapter 2, ‘s.10’ of the Legal Profession Uniform Law Application Act 2014.
Essentially, a default notice specifies particulars of a default under a lease and provides a time period for rectification. Such notice becomes a rescission notice if it also states that unless the default is rectified together with the payment of the landlord’s reasonable legal costs and penalty interest, the lease is at an end. A rescission notice is also called a notice of termination. The landlord may attempt to evict the tenant and claim costs until the end of the lease. The tenant is also responsible for costs to find a new tenant. The landlord is obligated to mitigate (keep as low as possible) costs of the tenant by acting expeditiously to find a new tenant.
A landlord may also claim that the tenant’s conduct amounts to a repudiation of the lease. The purest form of repudiation is where a tenant returns the keys to the landlord and “walks out” before the end of the term. Effectively, the tenant has “turned its back” on its obligations under the lease. If the landlord accepts the repudiation in writing, the lease is at an end. The landlord cannot claim compensation against the tenant after the date of such acceptance.
Clause 35 of the REIV Commercial Lease lists clauses in the lease that are deemed essential terms, and a breach of an essential term is repudiation of the lease which a landlord may accept.
Faced with a notice of rescission, a tenant might apply to a court or tribunal to obtain relief against forfeiture. This is often granted if the tenant pays all arrears and costs. It can’t be granted if the landlord has secured a new tenant before the hearing date. In the event that the landlord signs a lease with a new tenant, and concomitantly, VCAT finds that the rescission notice was defective, one of these tenants is likely to be heavily compensated.
Relief against forfeiture is not available in circumstances where a tenant is in arrears at the time of exercising an option for a further term of the lease in circumstances where the landlord rejects the option.
Pursuant to ‘s.146’ of the Property Law Act 1958, a landlord’s right of entry or forfeiture under a lease is not enforceable unless the rescission notice: • Specifies the particular breach complained of; • If the breach is capable of remedy, requires the tenant to remedy the breach; • Requires the tenant to make compensation in money for the breach; and • Is given to the tenant for at least 14 days to allow the tenant to remedy the breach.
Under ‘s.146 (12)’ of the Property Law Act 1958, no notice is required before
CONTINUED ON PAGE 12
CONTINUED FROM PAGE 11
re-entry or forfeiture in the case of nonpayment of rent (See Clause 34.1 of the REIV Commercial Lease).
By reason of the forfeiture of the lease, a tenant in possession becomes a trespasser. The landlord may engage self-help in the form of police, security guards, locksmiths and the like. If more than reasonable force is used to affect re-entry, the landlord may be liable for damages or possible assault.
Should an eviction proceed unlawfully because the rescission notice was invalidly prepared or served, the landlord may be liable to the tenant for various costs (including loss of profit). Notices must be valid, unambiguous and strictly served in accordance with Clause 31 of the REIV Commercial Lease.
Tenant fixtures, fittings, goods, stock and perishable items left at the premises by the tenant or following eviction must be dealt with under Part 4.2, Disposal of Uncollected Goods, Australian Consumer Law and Fair Trading Act 2012. The landlord may affix a notice of reentry on the premises explaining the reversion of the lease and a contact phone number.
A default of lease is not the exclusive domain of a tenant. Landlord breaches commonly occur in regulated leases. Some provisions of the Act have devastating consequences when they are incorrectly applied.
Trap 1
If a landlord gives a tenant a disclosure statement and a proposed lease less than 14 days before the lease is due to commence, the term of the lease is taken to commence 14 days after the day on which the disclosure statement and proposed lease were provided [‘s.17(1C)’ and ‘s.94’ of the Act].
The ramifications of not understanding this may be significant as the start date of the term is not the date printed on the lease and not the date that the parties intended. Accordingly, the dates in important notices may be incorrect.
Trap 2
Under ‘s.28(1A)’ of the Act, a landlord is required to provide written information to the tenant at least three months before the last date that an option to renew a lease may be exercised, including the last date of renewal, the rent payable, the availability of an early rent review, cooling off rights and changes to disclosure statement information.
If the landlord fails to give the tenant all the information within the required time, the lease is taken to provide that the date after which the option is no longer exercisable is instead three months after the landlord notifies the tenant as required. That could unnecessarily prolong the lease term at the current rent.
Trap 3
Under ‘s.46’ of the Act, a tenant must be given an estimate of outgoings before the lease is entered into and thereafter, annually as prescribed. Case law has held that the tenant is not required to pay for any outgoing in the period for which an estimate of outgoings was not provided.
Trap 4
Where the lease does not provide for an option to renew, a landlord cannot assume that a retail tenancy will be at an end after the final day of the lease term. The landlord must, at least six months
but no more than 12 months before the lease term ends, give written notice to the tenant offering the tenant a renewal of the lease on specified terms or inform the tenant that the landlord does not offer a renewal of lease [‘s.64’ of the Act].
A landlord having made plans for the tenancy would be embarrassed to find, as is following up until it is received. Further, the same requirement applies to any notice under a lease, and most significantly, to a notice under ‘s.146’ of the Property Law Act 1958.
Estate agents who provide commercial leasing and management services are encouraged to develop a strong understanding of the legislation governing their activities. The consequences of a lesser approach are bound to be costly.
The author hopes he has provided some awareness of the care required to successfully navigate the complexities of this important area of practice.
on the last day of the lease, that the tenant may remain in possession for an additional six months because the landlord failed to provide the requisite notice under ‘s.64’. These notices are available on the REIV members portal but are not part of Vic Forms.
Trap 5
When serving a notice under ‘s.28’ or ‘s. 64’ of the Act, it is essential that it be served in a manner that guarantees that the intended recipient receives it. Where service is required on an individual, tracked delivery such as registered post is insufficient service because the envelope reaches a destination and not that person. A process where delivery requires a signature from the recipient at the time of delivery will suffice. Personal service by hand delivery is also acceptable. Where service is conducted electronically, requesting written acknowledgement of delivery from the recipient is of paramount importance
Norman Mermelstein is the principal of Law Ink Pty Ltd, a member of the Property and Environmental Law Section Leases Committee and Property Law Committee, Succession Law Committee member, an accredited mediator and licensed estate agent.
MVA BENNETT – YOUR FUTURE OUR BUSINESS
MVA BENNETT is a Chartered Accounting firm in Melbourne and a REIV strategic partner. Our belief is that YOUR FUTURE is OUR BUSINESS arising from a rich history that dates back to our founding in 1941. Our capabilities are delivered by a team of seven partners and fifty staff governed by the profession’s quality controls.
Why engage MVA BENNETT?
We strive to differentiate ourselves from other accounting firms by seeking to: • Develop agreed wealth goals, by identifying and aligning mutual values and obligations that will underwrite our relationship • Continually meet expectations, with strong communications throughout our engagement • Use cutting edge skills and tools to achieve our deliverables, and • Practise what we preach
For future information please contact – Nicholas Rodier – Partner – MVA BENNETT Chartered Accountants – nicholas@mvabennett.com.au – 03 9642 8000.
Level 5, North Tower, 485 La Trobe Street, Melbourne
