How good is your lease? – delinquent tenants

Tenant-in-default procedures for rental recovery and re-entry into possession are subject to specific statutory requirements. But forward-thinking commercial retail & industrial landlords can include many other measures at the time of lease drafting that significantly improve the landlord’s position and increase the prospects of successful recovery.

Provisions in commercial leases dealing with rental defaults vary widely.
Landlords should check their leases to ensure that they contain certain minimum default procedure standards.

• Service by fax: The inclusion of a simple provision allowing for service of a notice to remedy breach of covenant (and other documents) by fax on the tenant and/or the tenant’s solicitors saves valuable time in a default situation.

• No set-off clause: It is important that the lease unambiguously provides that the tenant can not raise any issue for example relating to failure to repair etc as a defence for non-payment of rent.

• Reasonable time to remedy: Property Law Act s 124 mandates that a notice to remedy breach of covenant given to a delinquent tenant must specify a “reasonable time” for the tenant to remedy the breach. It is important that such times be agreed in the lease for different classes of breaches e.g. 10 days for non-payment of rent.

• Incentives: It is important that the landlord considers when the lease is being drafted, whether any rental or other incentives given to a tenant should be deemed to be revoked in the event of default.

• Interest: It is important not only to specify an annual interest rate on arrears but also the interest calculation method eg “calculated and charged monthly”.

• Immediate guarantor liability: It is important to consider whether a guarantor will become immediately liable in a default situation even before the expiration of any “reasonable time” given in a notice to remedy breach of covenant.

• Statutory demand: It is important to include a right on the part of the landlord to issue a statutory demand under the Corporations Act in the event of any default.

• Landlord Certificate: It is important to include a provision that a certificate from the landlord specifying rent and other rear arrears shall be taken to the prima-facie evidence of the facts contained therein;

• Jurisdiction clause: It is important to include for tenant’s agreement of the court location (convenient to the landlord) that will have jurisdiction to determine any dispute.

• Termination and re-entry: It is important to specify what will and will not constitute re-entry and/or termination. For example, it might be prudent to include a provision allowing the landlord to change locks but specifying that this does not constitute re-entry or termination unless otherwise stated by notice.

• Conversion to the periodic tenancy: It is important to include a provision that the landlord has the option to convert the lease to a monthly tenancy.

• Removal of goods and fixtures: It is important to include a provision to the effect that any fixtures and goods left upon the premises are deemed abandoned and become the property of the landlord who may dispose of them at the tenant’s cost.

Don’t assume that your leases already include all protections available to landlords in dealing with delinquent tenants.

Don’t assume that even if your leases do not already contain sufficient landlord protections – that you must wait until you get a new tenant with a new lease to rectify the situation. Every variation, renewal and even a default gives you an opportunity to rectify deficiencies and improve the provisions of the original lease!

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