When the rent stops

Thursday, January 23, 2020

The market over the past 12 months has seen a lot of new and exciting businesses being created and taking spaces in the city as well as some well-established businesses unexpectedly fail. The failure of any business has wide reaching implications including affecting leases.

At the start of a lease the tenant and landlord are focused on taking or filling a space and the potential that creates for their business, often not giving a thought to the possibility of a business failure or a breach of the lease by either party.

Well-timed and considered action can avoid learning hard and costly lessons should an imperfect outcome eventuate.

Landlord cancellation

The Property Law Act 2007 creates a general code for the cancellation of a lease by a landlord.

A landlord cannot simply cancel a lease at their whim. To cancel a lease, a landlord must carefully follow the steps outlined in the Property Law Act. If these steps are not followed a landlord runs the risk of not validly cancelling lease.

Under the Property Law Act, if the rent has been unpaid by a tenant for a period of not less than 10 workings days a landlord can issue a notice to the tenant of their intention to cancel the lease. At the expiry of the period specified in the notice, if the breach has not been remedied (i.e. rent paid up to date) a landlord may exercise their right to cancel the lease.[1]

If the tenant has breached other covenants in the lease then the landlord must serve on the tenant a notice of the intention to cancel the lease and if at the expiry of a period that is reasonable in the circumstances the breach has not been remedied then the landlord can look to exercise their right to cancel the lease.

It is essential that the notice issued by the landlord contains the information prescribed in the Property Law Act.

Under the Property Law Act a notice must contain the following details:  

  1. The nature and extent of the breach;
  2. What the tenant must do, or stop doing, in order to remedy the breach or the amount that must be paid to compensate the landlord for the breach (this must be reasonable);
  3. The timeframe within which the breach must be remedied (this must be reasonable);
  4. The consequence if the breach is not remedied within the timeframe specified in the notice that the landlord may seek to cancel the lease; and
  5. The tenant’s right to apply to a court for relief against the cancellation of the lease, and the advisability of seeking legal advice on the exercise of that rights.

Only once the notice has been issued on the tenant and the timeframe for remedying the breach has expired, can the landlord apply to a court for an order for possession of the land or re-enter the land peaceably in order to effect a cancellation of the lease.

In Neglasari Farms Ltd v Brakatin Holdings Ltd (2010) 11 NZCPR 643, the validity of a cancellation notice issued by the landlord to the tenant was questioned. The court accepted that the notice failed to provide the tenant with what they were required to do, or stop doing in order to remedy the breach of covenant. However, the notice was held as valid because the breach of covenant was not one that was capable of being remedied by the tenant, the absence of recording how to remedy the breach did not make a difference to the tenant’s position.

The Property Law Act states that a notice of intention to cancel a lease is not invalid merely because the landlord has failed to specify the remedy for the breach, have required an unreasonable amount of compensation to be paid, or failed to disclose the amount of compensation payable for a breach that cannot be remedied.

Is there an alternative to the Landlord giving notice under the Property Law Act?

The short answer is no. Cancellation of a lease by a landlord for breach of a covenant by a tenant is only possible under the Property Law Act.

If a landlord does not validly cancel a lease they will not be able to re-enter and re-lease their premises which will have a significant impact on income.

Tenant cancellation

A tenant cannot cancel a lease under the Property Law Act and must instead look to the Contract and Commercial Law Act 2017 to cancel the lease.

The Contract and Commercial Law Act provides for certain circumstances in which a tenant can cancel a lease and restate the provisions from the now repealed Contractual Remedies Act 1979. A tenant cannot simply walk away from their lease or their obligations thereunder.

The circumstances in which a tenant can cancel a lease are:

  1. Where the landlord makes it clear by words or conduct that they do not intend to perform or complete performance under the lease (known as a repudiation).
  2. If there has been a misrepresentation, breach or expected breach of a term that is essential to the tenant.
  3. Where there is misrepresentation, breach or anticipated breach that will substantially reduce the benefit or substantially increase the burden of the contract on the tenant or will result in the lease being substantially different from that represented or recorded in the lease agreement.

A breach of an essential term of a lease will differ from lease to lease and is fact specific whereas repudiation of a lease has a more general application.

Not every breach by a landlord under a lease will amount to repudiation. The question of whether the lease has been repudiated is one of fact, degree and impression.

An extreme example of what may constitute a repudiation of a lease was demonstrated in Nordern v Blueport Enterprises Ltd[2]. The tenant, Panda, leased the 3rd floor premises to operate their computer personnel business. During the term of the lease the 4th floor of the building was leased to a tenant that operated, what was concluded by the Court, to be a brothel.

Panda and the new tenant shared an entrance and foyer. Panda complained to the landlord claiming that their “quiet enjoyment” of the premises had been interrupted as they constantly had people entering their premises looking for the brothel. The shared foyer was used as a urinal and a place to vomit, staff were propositioned and there were also complaints of noise and the smell of incense wafting through their premises. The landlord did not take action and the tenant left the premises in 1990.

The landlord then brought a claim against Panda for unpaid outgoings, rent, interest and costs from 1990 to 1991 when the 3rd floor premises were re-let to a new tenant.

The Court held, among other things, that because there had been substantial interruption which prevented Panda from enjoying its premises for the very purpose for which it was leased there had been a breach of the covenant of quiet enjoyment and the failure of the landlord to remedy the breach amounted to a repudiation of the lease.

However, not all perceived breaches by a landlord will amount to a repudiation of a lease. For example, in Relvok Properties Ltd v Dixon[3] the landlord’s action of advertising abandoned premises did not constitute repudiation. In Miller v Martin & Anor (1993) 2 NZ ConvC 191, 714 where the tenant left the premises voluntarily, the Court held that there was sufficient evidence for finding that despite the landlord re-entering the premises and changing the locks the lease remained on foot. The Court held that the lease only ended when the landlord took on a new tenant and that the Landlord was simply protecting his property when he re-entered and changed the locks.

When would a misrepresentation or breach of an essential term lead to the cancellation of a lease?

A tenant can cancel their lease if they have been induced to enter the contract by a misrepresentation, or where there has been a breach of a term that is considered an essential term of the lease by the tenant.

A misrepresentation is defined in common law as a misstatement of past or present fact. So called “half-truths” can also amount to a misrepresentation.

An example of a half-truth is illustrated in Wakelin v RH & EA Jackson Ltd (1984) 2 NZCPR 195 (HC). The defendant answered the plaintiff’s question truthfully, but purposefully did not disclose further information that would have been known to him as being of importance, therefore misleading the plaintiff into the contract.

If a tenant does not validly cancel its lease they will be bound to comply with the covenants under the lease including the obligation to pay rent for the term of the lease. This will undoubtedly affect the bottom line of any business.

Is there an alternative to formal cancellation?

A landlord and tenant can at any time mutually agree with one another to cancel a lease. In some instances, taking steps where it is clear the other party are or are about to be in breach of a term of the lease and discussing future steps can result in a better outcome for both parties.

Looking at a situation from a more preventative perspective, parties need to consider their respective positions and that of their business or investment at the time they are negotiating the lease. For example, a new business tenant taking on a 15 year lease may not be conducive to a favorable outcome as the businesses longevity is unknown, the tenant may left liable for up to 15 years of rent and the landlord left trying to recover that debt. Other considerations may include, whether the premises can service a business for the term of the lease, whether personal or bank guarantees are required or whether the flexibility of cash out and escape clauses are essential to either party.

Summing up

The process of cancelling a lease is a step by step prescribed process with no quick fix.  Following each step is important to ensure that any notice given is both valid and effective as an invalid notice will delay the cancellation process which will inevitably result in more costs being incurred by either the landlord or the tenant or both parties.

Having a professional objectively review any lease agreement and completing due diligence on your future tenant or landlord before any agreement is signed can make a huge difference. The relatively small investment in professional fees at the front end can save the barrage of headaches and large costs at the other end.

For further information, please contact Nadine Prutton or a member of our property team. 

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

 

[1] However, if the landlord believes on reasonable grounds that the tenant has given up possession of the leased premises the landlord does not need to serve a notice of intention to cancel the lease on the tenant but must serve a notice on the mortgagee or receiver, any subtenant or any mortgagee or receiver of the subtenant provided the names and addresses of those people are known to the landlord.

[2] [1996] 3 NZLR 450

[3] (1972) 25 P & CR 1