Commercial lease defaults — where a tenant falls behind on rent or other outgoings — are a recurring problem for commercial landlords, and one where the wrong response can make a difficult situation worse. Landlords have multiple options, from demand letters through to termination and re-entry, but each option has different legal requirements, different risk profiles, and different outcomes depending on the tenant's circumstances.
Review the lease first
Before taking any step, review the lease. The lease will specify: the cure period after a default notice before the landlord can take further action; the form of notice required; whether the landlord has a right to re-enter on a payment default and the conditions attached; whether there is a guarantee or bond that can be called upon; and any specific dispute resolution requirements before proceeding to legal action. Acting outside the lease process — even with good intentions — can expose the landlord to counterclaims or loss of their rights.
Formal default notice
The starting point for most defaults is a formal default notice under the lease, requiring the tenant to remedy the breach (pay the outstanding rent) within the specified period. This notice must usually be in writing and delivered in the manner specified in the lease. If the breach is not remedied within the cure period, the landlord's further rights activate.
Calling on the bank guarantee or bond
Most commercial leases require the tenant to provide a security deposit — either a cash bond or a bank guarantee. Once the lease default conditions are met, the landlord can typically call on this security without the tenant's consent. The bank guarantee or bond should be checked immediately upon default to confirm its currency and the process for making a call.
Re-entry and termination
Re-entry — physically taking back the premises — is a significant step and must be done in strict compliance with the lease and applicable state legislation. In Victoria, Queensland, and NSW, state-specific retail and commercial leases legislation imposes procedural requirements on re-entry that differ from the common law. Re-entry without complying with these requirements can expose the landlord to liability for wrongful eviction.
Termination of the lease does not extinguish the tenant's liability for rent — the tenant remains liable for rent through to the end of the lease term, subject to the landlord's obligation to take reasonable steps to mitigate loss by re-letting the premises.
Pursuing the arrears
Outstanding rent arrears can be pursued through the courts as a debt claim, independently of the lease termination process. Where a personal guarantee has been given by a director or individual, the guarantor becomes jointly and severally liable for the arrears. Guarantees should be considered at the earliest stage of the recovery process.
Contact Merion if you are a commercial landlord with a tenant in default — the recovery strategy depends on the specific lease terms, the tenant's situation, and your objectives for the property.