What to do when Tenants Don’t Pay
When a Retail Leases Act Tenant is in default in the payment of rent and outgoings it is important that the Landlord does not let the default get out of hand and exceed the amount of the security deposit held under the terms of the lease. Once the security deposit has been used up, the Landlord will need to rely on the solvency of the Tenant and any personal guarantees.
In our experience, the longer a landlord lets a default go, the less chance there is of full recovery.
Landlords should act promptly when there is a default. Once the friendly approach has been exhausted, a solicitor should be engaged to issue a formal Notice of Default giving the tenant a certain time to pay the debt in full (normally a minimum of 14 days after service) but will depend on the terms of the Lease.
The Notice of Default should clearly set out the breach (with reference to the relevant terms of the Lease) and can include details of what remedy the Landlord requires to rectify the breach.
Time periods set out in the Property Law Act, Retail Leases Act and the Lease must be strictly complied with. It is important to also properly serve the Notice of Default in accordance with the terms of the Lease.
If the Notice of Default expires without the Tenant rectifying the default then the Landlord has three options:
1. Do nothing;
2. Determine the Lease and re-enter the premises (and this should only be done after obtaining advice from a solicitor and only after the required procedure has been followed strictly); or
3. Seek an order from VCAT for possession of the premises.
If a Landlord wrongfully determines the lease and re-enters unlawfully then the Landlord can be exposed to a claim by the Tenant (which may include significant damages).
Upon the Landlord obtaining possession, it is important to allow the Tenant an opportunity to remove their possessions and then you can commence your claim against the Tenant for the arrears, make good obligations and losses arising from the default. Landlords have a positive obligation to mitigate their losses and the Landlord must use their best endevaours to re-let the premises.
If the Tenant objects to the Notice of Default as there is a dispute as to whether or not the default set out in the Notice of Default is correct, the Landlord may wish to avail themselves of the process of mediation at the Office of the Victorian Small Business Commissioner rather than taking action which could lead to a potential claim against the Landlord.
Every case is different and it is important to work through all issues with a solicitor who has experience in retail leases to ensure the best outcome is obtained.
