Retail Lease Disputes: what happens when tenants default

Choosing the right tenant is critical. A prudent commercial landlord will review a prospective tenant’s financial statements and trading history among other checks to ascertain if the tenant has the means to meet the payment obligations under the lease. But, that still may not prevent problems down the track.

When a commercial lease goes wrong, landlords must act to protect their asset, take steps to re-enter the premises, evict the tenant, recover any unpaid rent, outgoings and costs associated with the breach.

At that time, issues that landlords will need to consider include:

• What type of notice / demand should we give the tenant?
• Can we call on the bank guarantee immediately?
• How do we physically re-take possession of the premises?
• At what point is the lease terminated?
• What do we do with the tenant’s equipment and stock?
• When do we need to re-advertise the premises for lease?
• How can we recover the unpaid rent and outgoings?

But, when a landlord has terminated the lease, can a tenant still “fight back”?

In a word, yes.

In circumstances where a landlord terminates a lease for non-payment of rent, a tenant may apply for an urgent injunction at VCAT for relief against forfeiture and seek an order that the lease be re-instated and the tenant remain in occupation of the premises – at least until the main dispute between the landlord and tenant has been determined.

Relief against forfeiture is an equitable remedy and to succeed, the tenant must demonstrate to the Tribunal (among other matters) that:

• There is a serious question to be tried (and the tenant has a sufficient likelihood of success);
• Damages are an inadequate remedy; and
• The balance of convenience rests in the tenant’s favour.

The assessment of the “serious question to be tried” will be determined on a case-by-case basis and usually relates to the broader issue in dispute between the landlord and tenant.

The tenant will usually be able to overcome the remaining hurdles if it can show that termination of the lease will result in closure of the tenant’s business and its ability to generate an income.

To succeed in its application however, the tenant must also take immediate steps to pay all rental arrears and any expenses that the landlord has incurred by reason of the tenant’s breach. This includes reimbursement of the landlord’s legal fees.

The Tribunal must also be sure when granting such relief, the tenant will abide by the terms of the lease in the future. In Beamer Pty Ltd v Star Lodge Supported Residential Services Pty Ltd [2005] VSC 236 Justice Hollingworth said:

“The Court must be satisfied in relieving against forfeiture that there is a reasonable expectation that the tenant will honour the lease obligations in the future…….

……..A tenant must, as far as possible, attempt to remedy the breach or breaches alleged in the notice served and pay reasonable compensation for the breaches which cannot be remedied”

It is not, however, always the case that the tenant’s application will succeed. In circumstances where the tenant has repeatedly defaulted its obligations under the lease or otherwise shown a total lack of regard for the landlord’s premises, the Tribunal could refuse the application, even if there is a promise or a commitment to pay rent in the future.

In the Star Lodge referred to above, Justice Hollingworth said:

“Where the conduct of the tenant reveals a clear history of wilful breaches….. a case of contumacious disregard by the tenant of the landlord’s rights over a period of time, and a total lack of evidence as to the tenant’s ability to speedily and adequately make good the consequences of the default, relief against forfeiture will not be granted.”

Similarly, the tenant’s application could fall over if it cannot demonstrate an ability to pay rent into the future. in Jam Factory Pty Ltd v Sunny Paradise Pty Ltd [1989] VR 584, Justice Ormiston said:

“The power to refuse relief is clearly reserved for cases of consistently lengthy defaults which may fairly lead to an inference that, even if relief be given, there is a reasonable likelihood that the rent will not be paid in the future at least for some considerable time after the due date for payment.”

So, if a defaulting tenant does succeed in its application to the Tribunal, the silver lining for the landlord is that it will be on the basis that the default is rectified. It is also likely the landlord will be compensated its out of pocket expenses.

If you require any assistance with your retail or commercial lease or have any general enquires please contact Rob Oxley or a member of our Leasing and Lease Disputes Team.