Cancelling a Commercial Lease

Landlords are often confused as to whether the terms of their lease or the provisions of the Property Law Act 2007 (PLA) prevail when cancelling a commercial lease. It is vital that landlords understand the distinction and cancel a lease correctly to avoid a tenant seeking damages for wrongful cancellation of the lease.

There have been some significant changes to the law relating to leases in recent years. The PLA applies to every lease (with a few exceptions) made before, on or after 1 January 2008. A lease may only be cancelled in accordance with the PLA. Consequently the cancellation provisions contained in a lease have no effect unless they are consistent with the PLA.

Notice Requirements

Prior to cancelling a lease, the landlord must send the tenant a notice of its intention, either pursuant to section 245 of the PLA (for non-payment of rent) or section 246 of the PLA (for all other lease breaches).

The notice requirements are strict and it is vital that you discuss the circumstances with us prior to serving notice. The notice requirements include stating: the nature and extent of the breach; the amount owed or the action required, along with the timeframe, to remedy the breach; the consequence if the breach is not remedied and the tenant's right to apply to a court for relief against the cancellation of the lease and to seek legal advice.

A copy of the notice should be also be sent to any sub-lessees, mortgagees, receivers and guarantors.

Cancellation for Non-Payment of Rent

Before a landlord purports to cancel a lease for non paying rent:

• the rent must be outstanding for more than 10 working days; 
• the notice mentioned above must be served on the tenant; and 
• at the expiry of the period specified in the notice, the tenant has not paid the rent.

However, the PLA expressly states that the notice period may run concurrently with the 10 working day period in which the rent must be in arrears. Accordingly, the landlord may serve the notice once the rent is one day in arrears.

Provided the provisions of the PLA are strictly adhered to by the landlord and the tenant has not paid the rent by the required date, the landlord can cancel the lease.

Cancellation for other Breaches

In order to cancel a lease for any other breach of the lease (including non-payment of outgoings), the landlord must:

• serve the required notice of its notice of intention to cancel the lease; and
• give the tenant a "reasonable" period to remedy the breach.

What is considered to be a reasonable timeframe to remedy the breach will depend on whether the lease contains a specific timeframe for this situation, or, if not, then what would be considered a reasonable time in the circumstances.

Re-Entry of the Premises

After the lease is properly cancelled in accordance with the PLA, and only if the lease is properly cancelled, a landlord who wishes to exercise its right to cancel may:

• apply to a court for an order for possession of the land; or
• re-enter the land peaceably (and without committing forcible entry under section 91 of the Crimes Act 1961).

If a landlord elects to re-enter the land peaceably:

• the re-entry must occur when the premises are not busy;
• there is no use physical force of any kind; and
• the entry is through unlocked doors or windows.

Difficulties may arise if the tenant refuses to vacate the premises.

It is vital to follow the correct procedure as, if the lease is wrongfully cancelled, re-entry may amount to a repudiation of the lease contract. A repudiation of the lease by the landlord will allow the tenant to cancel the lease (releasing it from all future obligations) and claim damages under the Contractual Remedies Act 1979 (CRA). Under the CRA the tenant may be able to claim damages for business interruption, loss of profit, relocation costs and other damages relating to the wrongful cancelation.

While it is impossible to crystal ball gaze, there are some simple things that a landlord should do prior to signing a tenant up for a lease. The landlord should always:

1. undertake a credit check;
2. speak with references if possible;
3. require a personal guarantor to guarantee the tenant's obligations.

If you have any queries in relation to cancelling a lease, please contact us.