Glenn Duker on Commercial Lease Default Law
In this episode of LawBizNews with Glenn Duker, Glenn talks about commercial lease default and the implications for both tenants and landlords.
Glenn is principal lawyer at PCL lawyers in Melbourne Australia.
In this conversational 20 minute podcast, Glenn covers legal issues and practical solutions to common scenarios that leaseholders find themselves in.
Commercial Tenants Perspective
This episode covers default notices, breach remedy methods and other issues critical to tenants that have entered into commercial lease agreements.
Glenn does and has acted in the past for landlords in the instances of commercial lease breaches or defaults by tenants.
Todays podcast is co-hosted, designed to provide a fresh and informative approach to the issues that matter for Victorian business owners.
FULL PODCAST INTERVIEW TRANSCRIPTClick for Full Transcript
GLENN: You’re listening to Law Biz News and I am Glenn Duker.
WES: Hi, you are also listening to Wes Ward, I will be the co-host today on Law Biz News with Glenn Duke. And Glenn, today we are discussing a very interesting topic, I think, which is commercial lease defaulting. Now I know that in your practice you deal a lot with both sides of the fence in terms of the tenants’ perspective, but also from the landlords’ perspective on this, and there are a million different scenarios that can sometimes happen I am sure. Probably a really good starting point is to look at what a default or a breach of a commercial agreement looks like in all the scenarios, so that then people know what we are talking about today. How does that sound?
GLENN: Yeah, sure! A breach of the lease can happen in many ways, the most frequent way is when there is a default in payment of the rent; that is the one you hear about the most. That is the one that results in a lock out notice being stuck on the door and the changing of locks and so on. There are other types of default as well. You can have a tenant who has carried out unauthorized works at the lease premises, you can have a tenant who is using the premises for a use other than the permitted use, that is a couple of examples. Lease defaults can be remedied as a rule and generally if it is a retail lease, there really needs to be an opportunity for a remedy to take place. The landlord has got to afford the tenant that opportunity as a rule.
WES: So, you know, you talk about remedying and giving the opportunity in the payment issue, yeah. Like it can be harsh if they miss payment by 3 days and then the landlord comes down with a sledge hammer. Is that an issue or is it got to be a remediation process built into a commercial agreement, you know, that could be a significant sticking point.
GLENN: Absolutely! Look, if it is a non-retail lease, a landlord can enter the premises typically if the rent is one day overdue. If it is a retail lease, it is still incumbent upon a landlord to provide some notice period, and even then if it is a non-retail lease it is best practice to provide some sort of a notice period to a tenant before you go and enter. The reason for that the tenant has a right to an action which is called relief against forfeiture
WARD: Oh, Okay!
GLENN: So a tenant could, for example, be a florist for instance who has been locked out for nonpayment of rent, the florist could apply to VCAT for relief against forfeiture. Now, if that tenant has not been a persistent defaulter in terms of non-payment of rent, and it is the first time that this has happened as well, there is a very high chance that the tenant is going to be able to have their lease restored.
WES: What sort of time frame is this? You know if the landlord comes in with, you know, ‘right get out’, and then you go to VCAT which is the governing body in all these property in commercial areas in Victoria, what sort of time frame are we talking? Is it like they haven’t paid out in 45 days or between 6 days or 3 months?
GLENN: Yeah Sure. When rent is due, or when it falls due, which is usually on the first of the month or whenever the lease says that it is due. If you are a day late, that is a default. What generally happens is the landlord will issue a default notice to provide a period of 14 days to remedy the default, so there is that window of opportunity. And after that, that is when the lock outs come, if the landlord so disposed to do it. Now it doesn’t always suit the landlord to lock out a tenant, but that is the exposure that the tenant faces and it is a risk that needs to be taken seriously.
WARD: So, would, after that 14 day period be typical of a time frame when say a landlord would go to VCAT? Is it normally that sort of trigger point after . . . “I will give you 2 weeks to fix this up.” Is that normal or would be further again just getting quite extenuating?
GLENN: Well, once the landlord locks the tenant out, that is it from the landlord’s point of view. Unless they have they need to sue the tenant for some other thing, but then we have got a security deposit that they can draw upon and so on. But it is the tenant who has to move very quickly after the lockout if they want relief against forfeiture for a number of reasons, not least which is practical, the commercial reasons . . .
WES: Yeah! If you’re retail . . .
GLENN: Exactly, hello, if you are locked out of your shop, it is not good to be out of business for 3/4 weeks before you get round to doing something about it. What you do is go back and you try to get into VCAT and try to get in there urgently
WES: Okay. Now we look at some other breaches over. So we have covered the nonpayment issue, but when you start looking at unauthorized works, that sounds like a very specific legal term. What can unauthorized works look like and take shape as?
GLENN: Sure. Well, strictly speaking, all tenant feed out needs to be approved by the landlord. And some tenants don’t understand this, they this, “Well I have done my initial feed out, I get in there, I think I might make a few changes.” Now, if they are internal changes, often a landlord may not even be bothered anyway or too fast provided the make good provisions of the lease are handled properly at the end of the lease. But the issue is, if there is some knock on a effect for example, a tenant would like to carry out some works and do some damage to another part of the building which affects another tenant. Now you can imagine that this is just a huge risk for the tenant because litigation is going to follow, compensation is going to follow because the works weren’t authorized. And this is why these clauses are in leases, to help tenants not fall in default and to not cause problems that are going to ultimately cost them money as well as the landlord.
WES: A lot, more money, they just cut off the power to the rest of the building or something like that.
GLENN: That is right. So that is a default strictly speaking. If a landlord is looking to have a type of particular advantage and sometimes the landlord is wanting to move on a tenant for various reasons and they can look for breaches in a lease. So a tenant needs to be very sure that they are circumspect and that they are never in breach of their lease because it may not be a problem now, but just because the landlord hasn’t done anything about it straight away they might do something about it later on and it might be very difficult to remedy the breach.
WES: Is that a typical issue like they may, you know, the tenant may want something done and then it becomes a bit of an issue because they feel like the landlord is dragging their feet or, it is sort of technically part of the lease agreement, I don’t know to, keep water services going hunky-dory or whatever or little maintenance issues or something like you got a leaking part in the ceiling of your show room and it is creating a nasty stain and so it is not a deal breaker but eventually it is going to drive the tenant nuts.
GLENN: Well yeah, absolutely, these are landlord responsibilities; so just as the tenant has the responsibility to pay the rent, and pay for the outgoings and do their bit and be circumspect, the landlord has an obligation to provide quiet enjoyment of the premises.
GLENN: Quiet enjoyment
WES: That sounds like another legal phrase.
GLENN: It does, it is from another age, isn’t it that term. It kind of, it means what it sounds like.
WES: Which is?
GLENN: That the tenant can quietly enjoy the premises without interruption of the landlord.
GLENN: So the landlord has to provide services in all sorts of arguments. There can be shades of grey as to who has done what. For example, you can have a blocked toilet, but whose fault was it? If it is the tenant’s fault, the tenant has got to fix it. There might be some problems in the pipes which then can become a structural issue, which isn’t the tenant’s fault, and maybe a plumber is being called out on a Friday evening to run a camera down a pipe to try and work out who is right or wrong.
WES: Alright, so ultimately the plumber would be the arbiter of that particular . . . Right, so now we have covered nonpayment but also other breaches now as unauthorized changes. If we start looking at permitted use, I think that sounds like another legal term,
WES: And I am sure that is grey enough to imply all sorts of things and probably with uncollapsing what permitted use really means and how it applies to respected tenants more than anything.
GLENN: Well, the permitted use is what the tenant is allowed to use the premises for. Now, often, a lot of tenants come to me with their leases and say, ‘can you advise me in relation to this lease?’ and sometimes the permitted use is very narrow and I always encourage them to get a much broader definition because if they need to assign the lease later, it is far more advantageous, commercially advantageous to be able to offer the lease to someone. For example someone who needs an office, rather than someone who is an accountant, or rather is an accountant’s office. So then you have got to deal with the landlord if you want to assign, you have to change the use and so on, strictly speaking the landlord doesn’t absolutely have to agree because the lease say that. So you want to have a broad permitted use views. But where this can have impact in terms default is if perhaps in a more unusual scenario where someone is going to use the premises, say it is a mechanics premises and they are using it, I’ll use the example as a florist again. I mean they are not the same use. The landlord might not care in one sense but that could have a knock on effect, because if the landlord owns other properties nearby, or as part of the shopping centre in particular, it becomes very relevant – the permitted use will need to be strictly adhered to. So if the tenant steps outside of that, it could mean default. If they don’t better fix it, if they don’t remedy it within the normal 14 day they could lose the lease.
WES: 14 days is a common standard window for breach remedy.
WES: Is that correct?
GLENN: That is correct.
WES: Okay, when you are advising landlord clients, and one of their tenants has fallen into breach, what do you advice? How do you tell them to go about remedying this?
GLENN: Alright, if I was acting for a tenant who is in default . . .
WES: Acting for a landlord.
GLENN: Acting for landlord. A landlord has certain rights, we would serve a default notice on the tenant and it is very important to serve a default notice quickly and for each and every breach if there are breaches happening at different times. Now, if there are a number of breaches at one time, you can put them all in the same default notice. Alternatively, if a tenant is a persistent breacher of the lease, you want to make sure that you are serving default notices on the tenant consistently because that actually has a very interesting knock on effect which not many people are aware of, but when it comes to the renewal of the lease for a further term – in other words when the tenant exercises their option – he can actually decline the tenant’s request to renew.
WES: Can that impact their ability to exercise their options?
GLENN: Absolutely it does because after you become a persistent defaulter, you generally are going to have a document along the way. For example, if they miss their rent in month 3, issue a default notice; miss it in month 4, issue a default notice; if they do it again in month 7 default notice. What a lot of landlords do is nothing, and they think, they are just a little bit late. But if there is going to be a pattern, you are best to strike early and strike hard to set up that pattern so then you can make an assessment as a landlord at the end of a term as to whether you really want these people to stay on. Now, there will certainly be reasonable arguments to run if there has been persistent defaults; to decline the tenant’s exercising option. So that is what I recommend to a landlord. From a tenant’s perspective, they really have to comply, there is no other way. If they like, they can challenge the default notice, they can say, “Well there really is no default,” and I am certainly seeing landlord’s issue default notices before which are frankly without grounds and fictitious, it doesn’t particularly help a tenant when you go to VCAT because there is a no-costs jurisdiction in the retail leases list.
WES: A what?
GLENN: A no costs jurisdiction. So in other words, if you have a retail lease dispute, it is virtually impossible to get costs aWESed in your favor.
WES: As a landlord.
GLENN: Or a tenant. It is just a no-cost jurisdiction. The system is designed to force the parties to come to an early resolution rather than to litigate. So whenever everyone’s incurring legal costs, if they’re incurring legal costs, typically in the retail leasing list, that is the case because it is complex law so there is a decent incentive to litigate. So to a tenant who is in default, best to fix it, if you know and believe it is true.
WES: Right, because you could be playing to a strong point. From a tenant’s point of view, it in their interest, especially if they want to build a cafe retail space and create goodwill in a spot, the more extensions like 5X5X5 or whatever it is 5 years, 3 or 4 times because I have got friends who do that and part of it, you know, actual asset, we have got options for the next 20 years on this space, they might get in there do an amazing job launching the new business, whether it is cafe or a show room or whatever it is and then they know there is a plan, say in 3 or 4 years knowing the options go to 20. That would be part of the value proposition in selling.
WES: So if the landlords coming in and going, “I have got the right extinguish your options,” that would be a pretty heavy stick, or at least that is their negotiation point at the end. Do you see that at all or it is already automatically calculated into their thinking?
GLENN: Yeah look, if there have been persistent defaults, that would be part of a potential buyers due diligence and if the lawyer is on the ball maybe they would be looking for that type of thing and you possibly make enquiries with the landlord. But, that can be a problem because theoretically there have been persistence defaults. Now, what you would want to do as an incoming purchaser and the signee of the lease, you would want to draw a line in the sand and make sure it is clear that the line you have drawn in the sand and then you exercise the option you’re not to be penalized. And it certainly is something that if that was proposed by the landlord as a basis for not permitting the exercise of an option, that is something I would recommend, the incoming assignee would take the [vic] and argue their case because they weren’t the defaulter, it was the previous . . .
WES: Right. Okay with regards to tenants, you act the tenant as well presently and in the past – what should they be doing if they feel that they may be approaching a breach scenario, through no fault of their own or whatever, rather than converge this maelstrom have to go to VCAT or whatever, do you have clients that come to you, “I am anticipating a breach coming up” or is it normally after the event has occurred and ‘Glenn help me.’
GLENN: From the tenant’s point of view, no news is normally good news. They mostly would approach a lawyer when something has happened. No one wants to spend their money on the lawyers. It is only when they have a problem they might be in default notice. Typically if they are being locked out or they are about to be locked out, they are not quite sure how to remedy the breach, or they want to remedy the breach and they know how, but they are not quite sure the approach they should take with the landlord because it could be a very aggressive process, very intimidating. And people are just wanting to run their business. They are looking 0:18:26.1 all of a sudden something has happened and things outside their control, so sometimes they come to us and they want us to manage their process.
WES: Have you had to represent the little guy against very aggressive landlords?
WES: Because that can be quite intimidating
GLENN: Yeah, it can be absolutely and so we do a bit of that sort of work.
WES: And even multi-nationals in that regard? I’m thinking massive hopping centres at this stage
GLENN: We have acted for a number of tenants in shopping centres.
WES: Okay very good.
GLENN: I won’t say more than that.
WES: Excellent. I think we have covered quite a lot of issues here today already and if people wanted to explore more about getting your services and your help, what would they need to do?
GLENN: They could go to our website pcllawyers.com.au or they can visit us here at Law Biz News.
WES: And also your office in the CBD of Melbourne? You are located in the CBD, excellent. What is the number they can call you on?
GLENN: 1300 907 335
WES: OK, you have been listening to another episode of Law Biz News, my name is [Wes Ward] and you have been listening to expert advice from…
GLENN: Glenn Duker.
WES: Bye for now
If you want to speak to Glenn, call him on 1300 907 335