What to do if a commercial tenant is breaching their Lease

Introduction

What can a Landlord do if the Tenant simply stops paying rent, stops paying the outgoings, or breaches other fundamental terms of the Lease (such as an unauthorised assignment or subletting)?

Issuing a Section 146 Default Notice

If the Tenant is in breach under the Lease, then a Landlord cannot simply re-take possession of the premises. Instead, a Landlord will be required to serve what is known as a “Section 146 Default Notice” (“Default Notice”) on the Tenant.

This Default Notice usually specifies the following:

• which conditions of the Lease the Tenant has breached,
• when the breach occurred (e.g. when did the Tenant complete unauthorised assignment of the Lease without Landlord consent, or when did the tenant fail to pay the rent),
• if the breach is quantitative (such as the failure to pay rent and outgoings), specifying the amount that was not paid, and
• how the breach can be remedied by the Tenant.

Importantly, the Tenant must be provided with at least fourteen days to remedy these breaches, and this must be specified under the Default Notice. If you do not provide for this period of time, the Default Notice will most likely be rendered ineffective, if challenged by the Tenant.

Landlords should ensure that the Default Notice is accurately drafted, as errors or miscalculations in the Default Notice may render it ineffective. Once the Default Notice has been drafted, a Landlord must ensure that it has been properly served on the Tenant. This is so they have a clear record of service, if the matter results in a VCAT dispute in the future. Landlords should consult with their lawyer about completing this process.

What happens if the Tenant fails to remedy all breaches within the specified period under the default notice?

If the Tenant has failed to comply with the notice and the time period has lapsed for compliance, it may then be possible for the Landlord to physically take re-possession of the property. Once again, Landlords should consult with their lawyer about completing this process. Usually, this will require the Landlord or their agent to physically affix a notice in a visible place at the premises, confirming the re-possession.

What happens if the Tenant disputes the Default Notice?

If the Tenant disputes aspects of the Default Notice, then it is possible for them to seek urgent relief at VCAT. Given the short time period permitted for compliance under the Default Notice, VCAT may be inclined to hear the matter relatively quickly. Landlords should be prepared for this, particularly if they have combative Tenants.

Impact of COVID-19 on the issuing of s146 Default Notices

Importantly, Landlords should note that whilst the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) are in operation until at least 28 March 2021. Therefore, Landlords may not be able to issue default notices until this time for non-payment of rent and outgoings. This will depend on whether the Tenant is eligible for protection under the Regulations. Landlords should consult with their lawyer about their Tenant’s potential eligibility for relief.

How can Sharrock Pitman Legal help?

At Sharrock Pitman Legal, we have Accredited Specialists in Property Law and Commercial Litigation, and can ensure that your rights as a Landlord or Tenant are protected. If you require advice or assistance, please do not hesitate to contact us on 1300 205 506 or alternatively fill in the contact form below.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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