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How to resolve a commercial lease dispute.

3 min read

25 Nov 2020

Commercial lease disputes can be costly and time-consuming for both landlords and tenants. The issues are often complex and acting without proper advice from an experienced commercial lease lawyer can have unintended consequences.

Both commercial landlords and tenants should understand their rights and how leasing laws affect them, so they make the right decisions and get the best outcomes. Our property lawyers have prepared an overview on how to resolve a commercial lease dispute that explains the legal processes.

COVID-19 Changes to Commercial Leasing

There will be many lease disputes over the next coming months as the Government’s COVID-19 commercial leasing regulations protecting Commercial Tenants is wound back. Both Landlords and Tenants will need to know what their rights are and how they can avoid disputes becoming costly.

The current COVID-19 law changes have allowed tenants to negotiate rent relief with their landlord. When the time comes to paying full rent again, many tenants, especially in Victoria, can find themselves in financial difficulty or possibly paying more than they need to.

To pre-empt issues and help resolve commercial lease disputes temporary measures have been brought into place to help businesses and tenants survive the Government lockdowns due to COVID-19. These largely untested laws and regulations have raised many questions and are largely misunderstood. It is important to get a thorough understanding for both landlords and tenants on the changes as they have more medium-term implications.

The COVID guidelines are briefly summarised as:

  • The Code of Conduct was drafted for use by all states and territories;
  • The COVID-19 commercial leasing Regulations became law in Victoria to enforce the changes;
  • Tenants and Landlords must act in Good Faith;
  • Tenants have access to rent relief in the form of rent waiver (never to be repaid) and rent deferrals (to be repaid in the future)
  • Mediation is a key element to have the parties resolve the dispute; and
  • If mediation is not successful you may go to the Victorian Civil and Administrative Tribunal (VCAT).

Landlords, Tenants, Agents and even some lawyers have been confused on how these new laws work, especially around the amount and timeframes for repayment of rent relief. The scheme is tied to eligibility for Jobkeeper and reduction of turnover of the business. The two-pronged approach of rent waivers and deferrals has added another element that has caused common confusion.

It is important to get legal advice on what you are legally entitled to, and not rely solely on the managing agent or others. The law is new and largely untested.

We have experience in handling these negotiations for our clients and helping them prepare for mediation. If your lease dispute is as a result of COVID-19 we can provide clear advice on this legislation and your options.

Typical Lease Breaches

A breach of a lease for non-payment or a breach of other terms is common in commercial leasing. Understanding your options for how to resolve the breach is important for both tenants and landlords.

The default can be an isolated issue and may not mean the termination of the lease, so it important that the right approach is taken. The relationship will have to be preserved as best it can for the benefit of both the landlord and tenant.

There are several ways that you would traditionally resolve a lease breach, which are:

  • Serving a notice of default to remedy breach
  • Re-entry of premises and lock-outs
  • Commencing legal action to recover losses

Each of the above actions should be carefully considered including associated legal and other costs.  Each action may invoke a response from the other side which should be considered in advance. To avoid a counter-claim from the other side, the relevant laws and processes must be followed.

Responses to the above actions typically include:

  • Rectifying the breach
  • Injunction – Court Order to prevent the other party taking action i.e. preventing a lockout
  • Counterclaim to claims for damages

What Constitutes a Breach?

There are different types of breaches in commercial leasing and there are approaches that landlords and tenants should take if there is a breach.

The most common default would be for non-payment of rent but there are many instances where a landlord or tenant don’t comply with their other lease obligations or deny the other party their rights. Breaches can arise from rights and obligations specifically under the lease or more broadly at law.

It is especially important for tenants to be informed of what rights and obligations they have if the landlord breaches the lease. The law is strict and many tenants unwittingly make bad decisions when faced with a dispute with their landlord that harms their position. This is also true for landlords.

There are different types of breaches that call for different courses of action. It is vitally important to have an opinion from a commercial lease lawyer about what rights you have under your lease and at law. This will help determine what remedies and options you have to fix your commercial lease dispute.

Establishing the Grounds of the Breach

The first step in any dispute is establishing the rights and responsibilities of each party. It may be contractually easy to establish but difficult to enforce. This is where legal advice on lease disputes will assist in giving you options and different approaches to resolving the dispute for the best outcome. Each case is different and warrants a different approach.

Once the legal grounds are established it is easier to navigate what will be the most cost and commercially effective way to resolve the dispute.

In resolving the dispute, you may be looking for financial compensation for loss (damages) or just for the issue to be fixed where no damages for loss are sought.

Private Negotiation

Before and during any dispute there are a variety of ways the two parties can correspond. It may be that each party corresponds directly or through their lawyer. It is important to take care if you are corresponding directly because it is important you understand the potential liabilities you may have, and that you don’t give away more than you have to. Getting legal advice will help you on what you should and shouldn’t put in writing and how it affects your position.

Getting legal advice early can help you establish your legal position and minimise liability. Getting legal advice does not mean that you are launching legal proceedings. It does give you a good framework and some practical options on what to do to help your situation.

Having a lawyer outline your perspective can bring the other side to focus on the issues at hand and take your complaint seriously. Whether this is a breach from the landlord or the tenant, articulating the matter will make it easier and faster to resolve.

  • Do
    Get the right legal advice early.
  • Don’t
    Put it in writing things that may harm your position.

Notice of Breach

If you are a landlord intending to serve a notice of breach under a commercial or retail lease, it is important that it is done correctly and in accordance with the law.

If the notice is not correctly drafted and served on the right parties, it may be invalid and potentially struck out later. This would mean that you will have to serve another notice and wait the appropriate period specified within the notice.

If the communication between the landlord and tenant has reached a stalemate this may be a good way to push the matter forward and provoke further action from the tenant and get a resolution.

Depending on the circumstances a notice of breach may work well and get a quick result. It may have other unintended consequences so it best to consider the nature of your relationship with the tenant.

Re-entry of Premises and Lock-outs

Lock outs can be undertaken by the landlord if the tenant fails to rectify the breach specified in the notice breach served on the tenant, within the period specified in the notice. A notice is required to be served in order for a landlord to lock out a tenant.

If a tenant is locked-out they may apply for and obtain an urgent injunction to gain re-entry and possession of the premises. It is important that the lockout is handled carefully to avoid claims for compensation or counterclaim if the lockout is deemed unlawful.

The landlord is able to remove and store the tenant’s goods (at the tenant’s cost) if arrangements are not made to collect them after the lease ends.

Legal Action via the Courts

Depending on the nature of the breach and the type of relief is sought, most lease disputes are handled by VCAT. Matters can resolve earlier via private negotiation and mediation. Many litigious matters settle before ending up in a court or VCAT. Litigation can often force the other side into a settlement agreement and/ result in the rectification of the default or dispute. One benefit of commencing proceedings is bringing an end date to the dispute.

If you have been served with a writ or complaint as a landlord or tenant, you may have a defence and/or counterclaim to that suit. A litigation lawyer with commercial lease experience will be able to advise you on the merits of your case.

What is at Stake?

Commercial tenants and landlords must think carefully about pursuing each other for a default, and what steps they take in this regard without advice. There can be a variety of commercial matters which need to be considered, such as ongoing relationship, severity of the issue, reputational issues, market conditions and the nature and state of the premises.

It is important that when you take action to recover your loss arising from a default, that you do so with legal advice. Commercial and retail leasing are complex areas of law and as a landlord you should be aware of the tenant’s rights before acting.

As a tenant your business premises are vital to the functioning and viability of your business. If a breach involves the loss of enjoyment of peace and quiet at the premises and inhibits the functioning of your business, the costs can quickly mount. This is particularly the case for tenants which manufacture food or medical products, where the condition of the premises is of the utmost importance to the tenant’s business.

As a tenant you most likely have some form of security deposit and/or guarantee that you have provided the landlord at the beginning of the lease.

These are typically:

  • Directors Guarantees; or
  • Bank Guarantees.

Depending on the nature of the guarantee it can be leave the landlord with opportunity for pursuing you if they suffer any loss.

It is important to have a clear understanding on what exposure you have. This can also inform how the lease dispute is handled.

I just want to Terminate my Lease

It is possible to terminate a lease but there must be a legal basis for it if you want to avoid being sued for damages and loss. There may be a range of things that can be done to terminate a lease without exposing you to liability.

If you terminate your lease without the proper basis it is a breach of the lease.  For this reason, it is important to receive proper legal before taking any action terminating the lease.

How We Can Help…

Just as there are many ways lease breaches arise there are many ways and options available to the parties to resolve commercial lease disputes and breaches. We provide advice that is based on experience and deep legal knowledge. Our lawyers’ working knowledge and experience of the law in this area will give you the best opportunity at success. Our lawyers experience affords our clients with a wealth of knowledge on options and expert negotiation skills when resolving commercial lease disputes and legal issues.

Our work is professional and high quality. We consider all aspects of our clients’ issues and work towards achieving the best outcome for them in their legal matters. Our lawyers understand the commercial realities and how to achieve outcomes that are commercially viable. We have helped many clients with their leasing disputes and breaches irrespective of whether you are an SME, individual or organisation we can assist.

For more information on how one of our leasing lawyers can assist contact us on 1300 907 335 or complete an online enquiry form and we will be in contact with you promptly.

Disclaimer: This article has been prepared for general information purposes and may not apply to your situation. This information should not be relied upon for legal, tax or accounting advice. Your individual circumstances will alter any legal advice given. The views expressed may not reflect the opinions, views or values of PCL Lawyers and belong solely to the author of the content. © PCL Lawyers Pty Ltd.

If you require legal advice specific to your situation please speak to one of our team members today.

About The Author - Chris Karatselios

Chris is an Accredited Commercial Law Specialist and a Partner at PCL Lawyers. Chris has approximately 30 years’ experience in commercial and property law. Chris has extensive expertise in complex...

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