What can I do if my tenant stops paying rent?
A tenant’s obligation to pay the rent on time is a fundamental obligation under any commercial lease. Landlords become frustrated and contemplate cancelling the lease where the tenant persistently fails (or even refuses) to pay rent. Before the right to cancel is exercised, it is important that landlords carefully check the terms of their lease and comply with the provisions of the Property Law Act 2007. If a landlord does not follow these requirements, the landlord runs the risk of wrongfully interrupting their tenant’s business, which can have drastic unintended consequences.
Non-payment of rent, which is the most common form of default under a lease, usually indicates the tenant’s business is struggling financially. It could be temporary or the beginning of a bigger problem for the tenant. Often, the situation can be turned around; so, we generally recommend the parties discuss the issue first and consider negotiating an arrangement which allows the tenant to “catch up” on the arrears before any formal steps are taken by the landlord. This is almost always the preferred, more cost effective, and timely solution.
Cancellation under the Property Law Act 2007
If it becomes apparent the tenant’s situation will only worsen or negotiations fall over, the landlord has the ability to issue the tenant a notice of intention to cancel the lease (PLA Notice).
A PLA Notice sends a clear message to the tenant that the landlord is serious about cancelling the lease which can put the landlord in a stronger position to elicit payment.
A PLA Notice must include adequate information about the:
- nature and extent of the breach
- amount that must be paid to remedy the breach
- period within which the breach must be remedied
- consequences if the breach is not remedied
- right to apply to court for relief against cancellation; and
- advisability of seeking legal advice on the exercise of that right.
If the PLA Notice is not remedied within the required period, the landlord may cancel the lease by ”peaceably” re-entering the premises (without committing forcible entry under the Crimes Act 1961) and changing the locks. If the tenant is unwilling to vacate the premises or re-entry is not possible without the use of force, the landlord may apply to the court for possession orders.
The tenant and any guarantor(s) remain liable for the unpaid rent to the date of cancellation. And, they are liable for other losses suffered by the landlord. Such losses typically include the cost of reinstating the premises, loss of rental income, and any diminution in rent paid by a new tenant. However, those losses are subject to the landlord’s obligations to mitigate their loss.
If you are a landlord with a tenant in default and wish to consider your options, we would be happy to assist you. For more information, contact Paul Kim.