In the current economic climate there may be some businesses that are looking at closing down. This may involve getting out of a lease of your business premises. Commercial landlords and tenants need to remember that the Property Law Act 2007 (“the Act”) may over ride some of the terms of your lease.
Terminating the lease if the Tenant has not paid their rent
Most leases entered into prior to 1 January 2008 would have a term allowing the Landlord to re-enter the premises, thereby terminating the lease, if the rent was in arrears by 14 days or more. The Act has overridden these terms.
It is still possible to cancel a lease for unpaid rent and/or other breaches by the tenant of the terms of the Lease. However, a set procedure must be followed. Firstly, the rent payment must be at least 10 working days overdue. Weekends, public holidays and the days between Christmas and 2January are not working days, so the rent must effectively be overdue for at least two weeks.
Next, the landlord must give written notice to the tenant of its intention to cancel the lease. The Act requires the following details to be included in the notice, being the:
§ reason why the lease is being cancelled (i.e. for non payment of rent):
§ amount that must be paid to remedy the situation;
§ period in which the amount must be paid (which must be at least 10 working days from the date the notice is served on the tenant); and
§ consequences of non payment within the period.
If the amount owing is not paid within the time specified in the notice, then the landlord can cancel the lease.
This means that the earliest a Landlord can terminate a lease is when the rent is already in arrears by at least 20 working days. Add in time to prepare the notice and other matters that get in the way and a Landlord may find that the Tenant has rent arrears of a month or more before the Landlord can actually terminate the lease.
Distraint
Many lease terms allow the Landlord to take the Tenant’s plant, equipment, chattels or stock to pay for rent arrears.
The Act has abolished the right to distrain for rent. So Landlords, even if your lease has a term allowing you to distrain for unpaid rent, you can not do so.
Recommendation
If a Tenant has not paid rent and the lease is terminated all a Landlord can do is sue the Tenant for the rent arrears and any other breach of the lease. We recommend that Landlords consider requiring a tenant to give security over property of the Tenant’s or Guarantor’s for unpaid rent or other breaches of the lease when entering into the Lease. The result being that the Landlord would be a secured creditor if the Tenant’s business fails and you are lining up with other creditor to be paid. Secured creditor gets paid ahead of unsecured creditor.
