LOCKING UP TENANTS AND RELIEF AGAINST FORFEITURE
Catherine Hallgath, Partner, Mills Oakley Lawyers
Australian Institute of Conveyancers NSW Division
Nowra – 5 May 2012
This page examines the procedure to follow if you are a landlord and wish to “lock out” a tenant
from leased premises. The procedure for locking out a tenant is controlled by the law, the terms
of the lease and the terms of any documents that are related to the lease.
“Locking out” is the term generally used when a landlord changes the locks on premises and so
prevents a tenant from accessing and using them. This act is an act inconsistent with the
tenant’s rights under the lease and so terminates the lease.
It is important to follow the correct procedure when locking out a tenant because if a landlord
does not do so, the landlord may become liable for a damages claim from the tenant even in
circumstances where the landlord had the right to lock out the tenant.
Before we proceed to examine the five steps to successfully locking up a tenant from premises,
a landlord should really consider whether or not the landlord really wants to lock the tenant out
of the premises. There are a number of solid commercial reasons a landlord may not want to
lock a tenant out of premises even where the tenant is late in paying the rent. Some of these
reasons are:
1.
the commercial environment may mean that is difficult or expensive to obtain a new tenant;
2.
a new tenant may not agree to pay the same amount of rent as the existing tenant or may
require additional incentives to be paid;
3.
the cost of obtaining a new tenant may not be able to be recovered from the existing tenant.
It is likely that the bank guarantee will not be sufficient to cover all of the loss suffered and
the costs incurred by the landlord or the existing tenant may be existing on a month to
month basis where sufficient income is received from the premises to pay the rent each
month but where if the lease is terminated no further funds would be forthcoming or
available to pay the additional costs.
For the purpose of the paper, I have assumed that the landlord does wish to lock the tenant out
of the premises.
1.
INCORRECT LOCK OUT = DAMAGES CLAIM
If the landlord does not follow the correct procedure to lock a tenant out of premises, then
the landlord may be subject to a claim for damages brought by the tenant.
One example of this is where the landlord served a notice on a tenant requiring the payment
of the rent but giving the tenant one day less than the period required by the lease in which
to pay the rent. In that case, the court held that the lock out had not been carried out in
accordance with the appropriate requirements and so the lock out was an inappropriate lock
out.
In the case of Tour Creative Agency Pty Ltd v Payman & Anor, the lease required a landlord
to give 14 day’s notice to the tenant before terminating a lease for non-payment of money.
The landlord gave the tenant one day’s written notice. The landlord amended the notice
period verbally the next day to allow the tenant 14 days in which to make the required
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payment and then did not terminate the lease for a month after the original notice was
given.
In that case, the court held that the termination by the landlord was unlawful because the
lease required the landlord to give 14 day’s written notice to the tenant and the landlord was
not entitled to update the notice verbally.
2.
5 STEPS TO A SUCCESSFUL LOCK OUT
2.1 BREACH
There are three different types breaches and the notice requirements are different for each
type of breach;
(a) non payment of rent;
(b) a breach not related rent; and
(c)
non payment of rent and other breaches.
(a) Non payment of rent
A landlord is not required to issue a notice to the tenant requiring payment of the rent
before terminating the lease for non payment of rent alone. s129 Conveyancing Act
(NSW) 1919. However, issuing a notice requiring the tenant to pay the rent can assist
the landlord to both obtain payment of the rent and also to demonstrate to the court that
the landlord has not been frivolous or vexatious in exercising its rights to lock the tenant
out of the premises.
If a landlord is locking out a tenant for non payment of rent alone and does give the
tenant a notice requiring payment of the rent, the notice does not need to be in the
format required by s129 of the Conveyancing Act(NSW) 1919 .
If the lease is a retail lease, there are no requirements to mediate between the parties
before a landlord locks out a tenant for non payment of rent.
(b) Breach not related to rent
If the tenant has breached the lease other than in relation to not paying the rent, it can
be more difficult to prove the breach and whether or not there is a breach is less clear
cut.
For example, if a tenant has not used the premises for the permitted use, there is an
issue about whether or not the landlord has acquiesced in relation to the use of the
premises for the use actually used by the tenant. This is an issue in tenancies which
are subject to the provisions of the Retail Lease Act (NSW) 1994. Courts have held in
some cases that the permitted use under a retail lease is the actual use of the tenant
rather than the use specified in the lease.
In relation to breaches for a failure to carry out repairs or to comply with the obligations
to maintain and keep the premises in good repair, whether or not the tenant has in fact
complied with those obligations is often a subjective judgement and so difficult to prove.
In relation to breaches that do not relate to the non payment of rent, if you wish to seek
to rely on them to terminate a lease, it is appropriate to point out the issues to the
tenant when those issues first arise and then to require rectification early to prevent a
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tenant from claiming that the landlord’s failure to require the tenant to rectify the breach
earlier in the lease has lead to the landlord having waived the breach (thus meaning
there is no breach by the tenant).
If a landlord wishes to terminate a lease for a breach not related to rent,:
(i)
the landlord must ensure that the notice is in the form required by section 129 of
the Conveyancing Act. I have attached a copy of section 129 of the
Conveyancing Act to this paper; and
(ii)
the lease will often have a list of actions which are breaches of the lease. It is
important to check whether the action the landlord seeks to rely on as a breach is
in fact a breach of the lease.
(c) Rent and other breaches
If the landlord wishes to terminate a lease on the basis of the non payment of both rent
and other breaches, the landlord must comply with the provisions of section 129 of the
Conveyancing Act including those in relation to the form of the notice.
When considering whether or not to rely on a breach to terminate the lease, the
landlord should consider whether it is acting unreasonably or capriciously in relying on
the breach to terminate the lease.
A minor breach which is being used to overturn a valuable lease may appear to be an
unreasonable or capricious use of the power. This can lead to a landlord potentially
being required by a court to pay the tenant’s cost of seeking a court order for the
reinstatement of the lease.
2.2 NOTICES
The notices a landlord is required to issue before terminating a lease are contained in three
different spaces:
(a) the lease;
(b) any ancilliary documentation such as a right of entry waiver entered into between the
landlord, the tenant and the tenants bank; and
(c) the law, specifically section 129 of the Conveyancing Act (NSW) 1919.
(a) Required by the lease
Some leases may require notice to be given by the landlord to the tenant before
terminating the lease for non payment of rent. In that case, the requirement to give
notice will have been a term negotiated between the parties and must be complied with.
(b) Ancillary Documents
If a landlord has entered into a right of entry waiver with the tenant and the tenant’s
bank, that right of entry waiver may require the landlord to give the tenant’s bank notice
before terminating the lease for any breach of the lease, including non payment of rent.
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(c) Section 129 of the Conveyancing Act 1919 (NSW)
A landlord is not required to give notice if the breach of the tenant is the failure to pay
rent only. (section 129 of the Conveyancing Act) The exception from the requirement
to give a notice does not extend to any other payments under the lease.
The moment a notice relies on both a non payment of rent and the non payment of
other money or the breach of some other covenant of the lease, the notice issued by
the landlord must comply with the form and other requirements of section 129 of the
Conveyancing Act.
In order to make the termination of the lease clean cut, it is best to rely on a straight
forward breach which that is not open to argument or contention by the tenant. The non
payment of rent is ideal as the rent has either been paid or it has not been paid. It is
very seldom, if ever, that the question of whether or not the rent has been paid is
subjective.
When drafting leases consider if a landlord wishes to accept an obligation to issue a
notice to the tenant before a tenant is in default under a lease for failing to comply with
one of the terms of the lease. It is important to be careful if a requirement of this
nature is included as it may require the landlord to give two notices before terminating
the lease, that is, one notice under the lease and a second notice under section 129 of
the Conveyancing Act.
s129 Conveyancing Act (NSW) 1919 procedure
Four steps must be followed in order to ensure that the notice given under section 129
of the Conveyancing Act is correct. If the lease is terminated not in compliance with
this section, the lock out is incorrect and may lead to a damages claim by the tenant
against the landlord.
(i)
Correct form of notice and correct service of notice
The form of the notice is contained in schedule 6 of the Conveyancing Act 1919
(NSW). The statement at the bottom of the notice is crucial. That statement must
be included at the bottom of each notice served under section 129 of the
Conveyancing Act. If it is not included the notice is not valid.
The second key point is that the statement at the bottom of the notice in schedule
6 is not to be used in a notice where a landlord is terminating a lease for non
payment of rent alone.
The notice must be served correctly. The lease will contain the provisions for the
service of notices under it. If, for some reason, the lease does not do so then the
provisions of section 170 of the Conveyancing Act (NSW) 1919 contain the
approved methods for serving the notice. If the notice is not properly served, the
notice will not be valid.
(ii)
Notice must state the breach that is relied on
The notice must alert the tenant to the particular breaches on which the landlord
relies and what the landlord requires the tenant to do to end the breach.
This does not mean that the landlord must specify how the tenant must do
repairs. If there are several ways to repair an item, the tenant can choose which
of those ways it will use to repair the item. The notice must specify how to pay
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and where it must be paid. Macquarie Health Clinic v South Sydney Area Health
Service.
In the case of Fletcher and Noakes (an English case) the notice given by the
landlord stated that the tenant had broken the covenant for repairing the inside
and outside of the premises and required repair in accordance with the covenants
of the lease. The court held that the notice was insufficient because the lease was
over six houses and the notice did not indicate in which of the houses the default
was made.
If the breach is a monetary breach, best practice is to specify not just an amount,
but what the required payment was, when that payment was due how much was
actually paid and then provide a subtotal.
(iii)
Require rectification of the breach
The notice must give particulars of what is required to rectify the breach, for
example how much the tenant is required to pay, how the tenant is required to
pay it (for example by bank cheque), where the tenant is required to pay it and by
when the amount must be paid (for example 5pm on 25 May 2012).
If the breach is not capable of rectification, the notice must ask for compensation.
This paper does not discuss that issue. I do note that there are a number of
potential complications that could arise in this instance about whether or not the
compensation is reasonable and this will lead to a number of side issues.
In the case of Fox v Jolly the landlord had leased six houses to a tenant under
one lease. The notice included a schedule of dilapidations and required “make
good of all cement fillets and flashings and repair landings and other woodwork”.
The court held that the notice was sufficient. The court also stated that it was not
sufficient merely to say “you have broken the covenants for repairing”.
A landlord could be in a similar situation to that of Fox v Jolly if there was one
lease over more than one floor or more than one shop. In that case the court also
held that if there were several as to how to water proof a leaking ceiling, all the
landlord needs to say in the notice is to require the tenant to fix the leak. The
landlord may not tell the tenant how to fix the leak.
(iv)
Give a reasonable time for rectification
Section 129 of the Conveyancing Act requires a notice to give a reasonable time
to the tenant to rectify a breach. It is important for certainty to specify the time
period the tenant is given to rectify. However, if the time contained in the notice
for rectification of the breach is not reasonable, the termination in accordance
with the notice is an incorrect termination.
The issue then arises as to what is a reasonable time. The currently accepted
time period for payment of money is generally 14 days. A period of 7 days is seen
as being a bit too short, especially where the lease is valuable. However, if the
breach relates to the failure to carry out works, a longer time period may be
necessary as the tenant may need to obtain quotes and ensure that builders are
available to carry out the work.
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A landlord is only entitled to re-enter the premises if the tenant fails to comply with
the notice within a reasonable time. This is regardless of whether or not the time
period is contained in the notice.
2.3 ACTION
A landlord must not wait to long after issuing a notice and having it expire before taking
action under it otherwise the notice may be held to have lapsed. If a landlord re-enters
premises and terminates a lease under a notice that has lapsed, that is an incorrect
termination.
There are 8 points to consider when deciding when and how to re-enter the premises.
(i) Consider the best time
The early morning before people are in the premises may be best. This is because it
avoids confrontation and potential risks. If a business has busy days and less busy
days than perhaps choose a less busy day.
(ii) Employ a locksmith and security guard
If a situation has between the landlord and tenant is tense, it may be best for the
landlord not to attend the lock out.
(iii) Consider filming the re-entry
If the re-entry has the potential to be difficult or violent the landlord may wish the
consider filming the re-entry as proof that not violence occurred and the tenant’s
property was undamaged.
(iv) No physical contact
The law does allow “reasonable force” to be used. However, whether or not the force
used was “reasonable” is subjective and difficult to prove after the event. The fact is
that any force or physical contact will enable the recipient of that force or physical
contact to raise a claim or an action for assault.
(v) The re-entry must be a complete re-entry
All locks must be changed and all means of access must be blocked, for the re-entry to
be complete.
In New South Wales, a partial re-entry of the premises is not sufficient to terminate a
lease. If the landlord cannot access part of the premises, the landlord may need to reenter or terminate the lease in another way such as using a power of attorney
contained in the lease to surrender the lease. In that case, it is important to ensure that
the terms on which the power of attorney has been granted are sufficient to allow the
power of attorney to be used in this way. The power of attorney is likely to also be
required to be registered before it can be used for this purpose.
If a member of the tenant’s staff or one of the tenants remains in the premise during the
lock out, even if all the doors are secured, the lock out is unlikely to have been a
complete re-entry and therefore would not be effective to terminate the lease.
If there is any question about whether or not the lock out has been effective, the
landlord should obtain a court order for possession.
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(vi) Notice left at front of premises
It can be helpful to prepare a notice that notifies the tenant what the landlord has done,
what the breach of the tenant was and that it was not remedied. That notice can specify
the times the tenant may attend the premises to collect its property under supervision. I
note that it is a breach of the law to hold a tenant’s equipment and property until rent is
paid.
(vii) Locksmith and security guard to make statements
The landlord should also obtain statements from both the locksmith and security guard
of what happened at the premises. These statements should be provided immediately
after the lock out in completed. Then the statements can be used as evidence, if
necessary in any court hearing.
(viii)Allow tenants supervised access to remove its property
It is best from a landlord’s perspective not to allow unsupervised access to the
premises and not to allow a tenant to remove fixtures as there is a high potential for
damage to be caused.
2.4 TENANTS RIGHT TO SEEK REINSTATEMENT IN THE PREMISES
If a landlord re-enters the premises and terminates the lease, the tenant is entitled to apply
to the court for relief against forfeiture. This means that the tenant asks the court to order
that order that the lease continue and allow the tenant to occupy the premises again on the
terms and conditions of the lease as if it had not been terminated.
The tenant’s right to apply to the court for this remedy is contained in section 129 of the
Conveyancing Act (NSW) 1919. The court has a discretion as to whether or not it will grant
the relief. The tenant is not entitled to be reinstated in the premises as a right.
If the tenant is reinstated in the premises by order of the court that does not mean that the
tenant was not in breach of the lease or that the landlord issued the notice incorrectly. It
simply means that the court was able to negotiate a way forward between the landlord and
the tenant for the rectification of the breach and the continued occupancy of the premises
by the tenant. If the lease was terminated because the rent was unpaid, the court will
generally allow the tenant to re-enter the premises after the rent is paid.
The court will generally ask five question to determine whether or not to exercise its
discretion to grant relief to the tenant. These five questions were summarised in the case of
Stern v McArthur.
(i)
Did the conduct of the landlord contribute to the tenant’s breach? This is a very
important point
(ii) Was the tenant’s trivial or slight and inadvertent and not wilful?
(iii) What damage or adverse consequences did the landlord suffer as a result of the
tenants breach?
(iv) What is the magnitude of the tenant’s and the landlord’s gain by allowing the forfeiture
to stand?
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(v) Is specific performance of the tenants obligations under the lease with or without
compensation and adequate safeguard from the landlord?
The court noted that is was reluctant to interfere with the contractual rights of the parties
who have chosen to make timely effects of the contract.
If a landlord has been frivolous or vexatious in not allowing the tenant access to the
premises, the court is able to award costs against the landlord. This means that the court
will require the landlord to pay a proportion of the costs the tenant incurred in applying to
the court to obtain access to the premises.
However, the usual situation is that the court will award costs against the tenant. This
means that the tenant is required to contribute to the landlord’s costs of going to court to
determine whether or not the tenant is entitled to be given access to the premises.
However, as costs are often awarded on the scale, in effect, a landlord will only ever
recover 75% approximately of any costs it has incurred.
The issue of discretionary relief was also considered in the case of Sparta Nominees Pty
Ltd v Orchard Holdings.
In that case a tenant operated a supermarket from the premises.
It would have been a financial relief to the tenant if the lease was terminated because the
tenant was in debt to the bank and could not afford to repay the debt. The tenant could also
not afford to make improvements to the premises. On “very many” occasions the rent had
not been paid to the landlord over a period of 5 years. Often the delay in payment of rent
was weeks or more than a month.
The tenant did not keep a lot of the supermarket clean especially the meat and deli
departments, this was a breach of the lease. The tenant also did not adequately stock or
staff the premises, the staff were not well presented and the display windows were not
dressed, it advertised products on special that were not available and sometimes up to 322
or more products that were advertised were not available, the premises were not in good
repair, many products were over their expiry date and the fruit and vegetables department
contained rotten fruit. The landlord’s issues in relation to the tenant and breaches of the
lease ran for approximately 4 pages of the judgement.
The court noted that it did not require a tenant to be perfect. This was noted in the face of
what looked like a lot of breaches and a failing business. The court did acknowledge that
some courts are punitive but said that in this case the breaches were not wilful and it
granted the tenant relief against forfeiture and allowed the tenant to re-occupy the premises.
This judgement is an indication or an example of the level of seriousness of breaches the
court requires before it will refuse to allow a tenant to re-enter the premises.
2.5 WHAT TO DO TO SECURE THE RESULT
(a) The premises are returned to the tenant without court action
If the premises are returned to the tenant without the parties going to court, for example
an agreement has been reached between the parties to allow the tenant to continue
occupation of the premises, it is important to:
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(i)
sign and register a new lease. This is because the re-entry of the premises
terminates the lease, even if the termination of the lease was improper or illegal.
If a landlord allows a tenant to simply re-enter the premises without entering into
a new lease the tenant is most likely a monthly tenant; and
(ii) obtain payment of costs.
(b)
The tenant obtained relief against forfeiture in court
If the tenant was successful in a court action to obtain relief against forfeiture, there is
no need to sign and register a new lease unless the court order specifically requires
you to do so. However, you will still need to obtain payment of landlord’s costs and
exercise any right the landlord may have to draw down on the bank guarantee.
(c)
The tenant did not obtain relief
If the tenant has not been allowed back into the premises by the court order or the
landlord then the following items need to be done:
(i)
claim damages, for example: the cost of re-leasing the premises, the rent to the
end of the term, the removal of fit out, legal costs and any rent free given to the
new tenant;
(ii) draw down on any security held by the landlord and notify any guarantors of the
obligation to pay damages to the landlord;
(iii) remove the lease from the title;
(iv) start re-leasing the premises in order to mitigate the loss of the landlord.
In summary, the key to ensuring an effective lockout is to ensure that the procedure is followed
and most especially that the initial breach notice is correct and correctly served.
Catherine Hallgath
Partner, Mills Oakley Lawyers
E: challgath@millsoakley.com.au
T: (02) 8289 5806
Twitter: @challgath
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