Some recent commercial property matters that we have been involved in highlight the value of sending formal default notices to commercial tenants.
RIGHT OF RE-ENTRY
Most commonly, a Default Notice is issued as a precursor to terminating the lease and re-entering possession of the property.
A Landlord must comply with the requirements of section 146 of the Property Law Act before exercising a right of re-entry or forfeiture and termination of a lease. Section 146, in simple terms, provides that termination and re-entry rights cannot be enforced unless and until the Landlord has served on the Tenant a notice specifying the particular breach complained of and requiring the lessee to remedy the breach within a reasonable time, or if a time is not specified not less than 14 days.
The true purpose of the notice is to give to the Tenant an opportunity to consider its position and give a response. If the breach is capable of remedy, that response may be to admit the breach and propose a course of remediation. If compensation is sought, that response may involve agreement to pay reasonable compensation. If the breach is not admitted, or the landlord rejects a proposal for compromise, the tenant may then apply for relief against forfeiture of the lease.
For the notice to be effective the Landlord generally must specify the following:
- the Landlord is required to comply strictly with the requirements of s146 of the Property Law Act before terminating a lease;
- the Landlord is required to identify the obligation in the lease alleged to have been breached;
- the notice must properly specify the alleged breach of that obligation;
- the notice must specify what compensation the landlord is seeking that would accept to avoid re-entry or forfeiture; and
- the time allowed before re-entry must not be less than 14 days.
OPTIONS TO RENEW
The relevance of an effective notice of default also arises when an option for a further lease term is exerciseable by the tenant in a retail lease.
The Retail Leases Act provides that the only circumstances in which a tenant’s option is not exerciseable are if –
- the Tenant has not remedied any default about which the Tenant has been given written notice; or
- the Tenant has persistently defaulted under the lease throughout the lease term and the Landlord has given the Tenant written notice of the defaults.
So whether a Tenant is entitled to exercise an option in a retail premises lease may turn on whether the Tenant has been given notice in writing of the default or defaults.
We often see Landlords trying to rely on an invoice or a monthly statement of account to say that the tenant was given notice of default for the amount of arrears set out in the invoice or statement.
It has been reasonably clear for some time that a mere invoice or statement is unlikely to satisfy the requirements of the retail lease legislation in relation to notice of default. To avoid the argument that the Tenant remains entitled to exercise an option because the Tenant did not receive effective notice of their defaults, it is important to issue formal notices of default.
If you have any concerns in relation to a defaulting Tenant we would be happy to assist you to determine the best course of action and issue any required notices.