Taking possession following continuous breach; the end of the road or merely another twist…
You have tried talking (perhaps even pleading) and had your solicitor even write letters demanding your tenant rectify certain breaches under its lease, all to no avail. You pick up your lease slowly reviewing it, looking for a glimmer of hope. There it is, a provision gleaming out at you off the page, which reads:
“Notwithstanding any other provision in this Lease, if the Tenant has continually breached an essential term of this Lease, for a period in excess of fourteen days, whether demanded or not, the Landlord may lock-out the Tenant and repossess the premises.”
It’s the holy grail, the solution to your problems. You pick up the phone, telephone your agent and tell them to go in and change the locks. Later that night, the locks are changed, and notification given to the tenant that the lease is terminated. You wake up the next morning feeling optimistic that you have finally been able to rid yourself of that troublesome tenant or have you?
The next day you receive a letter from the tenant’s lawyer demanding to be let back into the premises and threatening to seek relief against forfeiture in the Supreme Court. Once again, like a deer in the headlights, you are back at square one. What do you do? What direction do you take? How do you navigate this issue?
In this article, we will explain how relief against forfeiture operates, the discretionary factors the court will take into consideration and how to best protect yourself from a claim being made.
What is relief against forfeiture?
Relief against forfeiture is where the Court makes an order that allows a tenant, who is threatened with eviction or has been evicted, to return and occupy the premises. In other words, it basically allows the tenant to continue its occupation of the premises, provided certain conditions are met.
How does it come about?
Relief against forfeiture can come about in two ways, through statute or in equity.
When we speak about statute, we are referring specifically to section 129 of the Conveyancing Act 1919 (NSW) (Act). Section 129 sets out the process that a landlord must take before re-entering the premises. This includes issuing a notice to the tenant specifying the breach and providing a reasonable time to remedy that breach (or if the breach is not capable of being remedied, payment by the tenant of reasonable compensation to you). Section 129 does not apply where the breach is non-payment of rent and accordingly there is no obligation at law to give notice before terminating a lease for non-payment of rent.
Alternatively, the Courts of equity can provide a different route for a tenant to seek relief against forfeiture. The foundation of any order in equity is that the Court considers that there is a certain “desirability that contractual promises should be observed, and contractual rights respected, and even more the undesirability of the law appearing to condone flagrant and contemptuous disregard of obligations.”
When the Court will be more inclined to grant relief
There is a long list of authorities which deal with tenants seeking relief against forfeiture following the threat of re-entry, or following re-entry, by the landlord.
The Court when considering applications for relief against forfeiture, will generally have regard to each of the following matters:
whether the breaches were willful, serious and repetitive in nature spanning many months;
whether the relationship has been antagonistic or effected by the conduct of the parties;
whether proper notice was provided by the landlord pursuant to section 129 of the Act;
whether the breach only relates to non-payment of rent and where that failure has since been remedied following the receipt of the notice, or the re-entry by the landlord;
whether the tenant has previously been evicted by the landlord for similar reasons;
whether the landlord holds a bank guarantee which would be enough, if called upon, to remedy the breach; and
whether the breach is of a positive covenant (an obligation to take positive action) rather than a negative covenant.
The cases highlight that if the relationship is a commercial one, for example a commercial or industrial lease, the Courts are generally reluctant to grant relief in equity. The Courts are more likely to grant relief where the dispute relates to residential leases.
Further, if the reason for the re-entry was as a result of the failure to pay rent, the Court will likely only order relief against forfeiture if the tenant pays you the arrears to date.
What happens if the Court grants the relief sought by the tenant?
The relief granted by the Court will often depend on whether re-entry has occurred.
Where there has been a re-entry, the usual order is that the landlord grant a new lease on the same terms and for the remainder of the duration of the previous lease.
Where there has been no re-entry and the lease remains on title, the usual order is that the landlord be restrained from taking any further action (in relation to the particular breach which is the subject of the proceedings) to re-enter the premises or making any application to the NSW Land Registry Services to have the lease removed from title.
Things to remember
Whilst your lease and the Conveyancing Act may provide you with a basis to terminate a lease by re-entry for a breach of a provision of that lease, the Court may still, in its absolute discretion, provide the tenant with relief against forfeiture.
In order to minimise the risk of a tenant seeking relief against forfeiture, before terminating a lease and taking possession of its premises, a landlord should:
issue a notice specifying the breach of the lease and demanding the breach be remedied;
if the breach is not capable of being remedied, compensation payable by the tenant with details of how the compensation was calculated;
provide a reasonable period of time for that demand to be met; and
attempt to come to an amicable resolution before terminating the lease and taking possession of the premises.
Authors: Melissa Potter and Adam Cutri