Cancelling a commercial lease – a look at potential problems on both sides
We are often asked by Landlords and Tenants regarding the terms of their Lease and what is required when cancelling a commercial lease. It is vital that both Landlords and Tenants understand their rights and that any cancellation of a Lease is completed correctly. If a Landlord wrongfully cancels a Lease the Tenant may be able to seek damages from the Landlord. If the Tenant does not fulfil their obligations under the Lease then not only will the Tenant have no premises to operate from but they may also be liable for substantial costs.
The Property Law Act 2007 (PLA) contains a code for the cancellation of a Lease. Regardless of what is stated in a commercial Lease between the parties, the minimum requirements under the PLA must be met. A Lease cancellation that does not meet the minimum PLA requirements will have no effect and potentially have a catastrophic effect on the Landlord.
Breach of Lease
Typically a breach of the Lease is either a:
- Failure of the Tenant to pay rent; or
- Failure of the Tenant to comply with another obligation under the Lease (for example failure to pay outgoings or to keep the premises maintained).
Just because the Lease has been breached by the Tenant does not mean that the Landlord is required to cancel the Lease. We normally recommend that parties come to an arrangement regarding rectifying any breaches before the Landlord issues a notice for the cancellation of the Lease. However it is important to note that the Landlord is not obligated to enter into any arrangements with the Tenant who is in breach of the Lease.
Prior to cancelling a Lease, the Landlord must serve a notice of intention to cancel the Lease (Notice) on the Tenant. The Act provides that for any Notice to be valid it must include the following:
- The nature and extent of the breach;
- The amount owed or the action required to rectify the breach;
- The period within which the breach must be remedied;
- Consequence if the breach is not remedied upon the expiry of the period specified in the Notice (being that the Landlord may seek to cancel the Lease); and
- The Tenants right to apply to the Court for relief against the cancellation of the Lease and that the Tenant should seek legal advice.
Should the Tenant be in arrears of the rent then the Landlord must give a minimum period of ten working days in the Notice for the Tenant to rectify the rent arrears. However, the PLA states that the notice period may run concurrently with the ten working day period in which the rent must be in arrears before a Landlord exercises any right to cancel the Lease. Accordingly, a Landlord can serve a Notice as early as the rent being one day in arrears. Part payment of any arrears in the Notice does not negate the Landlord’s right to cancel the Lease at the end of the period specified in the Notice.
For any other breaches of the Lease, not relating to rent, the Landlord must provide a reasonable notice period to the Tenant to enable the breach to be remedied. What is considered to be a reasonable time frame to remedy the breach will depend on whether the Lease contains a specific time frame to remedy the situation. If the Lease does not contain this time frame then the notice period will be that which is considered to be a reasonable time period in the circumstances. As an example, ten working days to remedy the non payment of outgoings would be reasonable. However ten working days may be seen as unreasonable to rectify maintenance or repair obligations of the Tenant (depending on what works were required).
Cancellation of the Lease
If the breach has not been remedied by the Tenant prior to the expiry of the period specified in the Notice then the Landlord can cancel the Lease. In order to cancel the Landlord will have to either:
- Apply to the Court for an order for possession of the land; or
- Re-enter the premises peaceably and change the locks.
Re-entering peaceably can be difficult if the Tenant will not vacate the premises willingly. It is advisable that the Landlord only re-enters the premises during daylight hours (not in the middle of the night) and without committing a forcible entry under Section 91 of the Crimes Act 1961 (not breaking and entering the premises).
Should the correct procedure not be followed and the Lease is therefore wrongfully cancelled, the Landlord’s re-entry may amount to a repudiation of the Lease. This would allow the Tenant to cancel the Lease (releasing the Tenant from all future obligations from the date of cancellation) and claim damages from the Landlord that result from the wrongful cancellation. Such claims from the Tenant may include:
- Damages for business interruption;
- Loss of profits;
- Relocation costs to a new premise; and
- Other damages that relate to the wrongful cancellation.
Cancellation of the Lease does not prevent the Landlord from pursuing the Tenant (or the Guarantor) for any monies owing, rectification of any damages or reinstatement of the premises or for any other breach of the Lease. However the Landlord does have an obligation to mitigate the Landlord’s losses by trying to re-tenant the property as soon as possible.
If you are a Tenant or a Landlord and have issues regarding your Lease, please feel free to contact Franklin Law to discuss.