Options for retail landlords recovering arrears from tenants, former tenants and guarantors.
By Samuel McMahon
21 April 2015
The Retail Leases Act 2003 (Victoria), and previous similar legislation, impose a number of important restrictions on landlords’ rights to recover unpaid monies against tenants and guarantors under retail leases.
Three important restrictions on landlords’ rights to recover unpaid monies under the lease against the tenant are as follows:
1. Before commencing legal action against the tenant (except as noted below), the landlord must attempt mediation of the “dispute” under the auspices of the Small Business Commissioner. A “dispute” may be nothing more than a non-payment of arrears, even if the tenant does not actually dispute that the money is owing. Only if the tenant refuses to participate in mediation, or the mediation is held and fails to settle the matter, can the landlord issue legal proceedings against the tenant.
2. Legal proceedings against tenants (except as noted below) cannot be commenced in the Courts, only in VCAT.
3. If proceedings are commenced in VCAT against the tenant (which is the compulsory jurisdiction in most cases), the tenant cannot be ordered to pay the landlord’s legal costs of the VCAT proceedings, unless the tenant has acted “vexatiously”, or has refused to participate in mediation. Such cases are in a small minority. So landlords are faced with a difficult decision:
(a) manage a VCAT claim unassisted by lawyers, or
(b) engage lawyers and receive no compensation for their costs even if the lease says the tenant must pay the costs of a breach (i.e. such a clause becomes legally meaningless).
An exception to the above three restrictions is given when the dispute is solely a dispute relating to the payment of rent. Realistically, however, overdue tenant accounts almost never solely consist of unpaid rent. Again, in all but the rarest of cases, the landlord is faced with a difficult decision:
(a) issue a claim for only the portion of the arrears that are for rent (thereby taking a cut of some sort, sometimes significant) so as to be able to claim legal costs of the Court proceedings, or
(b) issue a claim in VCAT for all the arrears, including outgoings, but give up any realistic prospect of claiming the legal costs of the action.
It is important to manage defaults by tenants and apportion amounts paid to outgoings, costs and interest first. A notice of default is a powerful weapon and combined with a personal guarantee/s and a security deposit will give the best prospect for a landlord to not be left out of pocket. In some cases, litigation should be a last resort after the tenant has vacated. Every situation is different and legal advice should be obtained by landlords from a suitably qualified lawyer.
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