Are you a business owner concerned about what will happen if you are unable to pay your rent amidst the COVID-19 pandemic? Or a landlord unsure of what your obligations are to your tenants in the event that they cannot meet their obligations under a lease agreement? In either scenario, it is helpful to familiarise yourself with the proposed government response, current laws surrounding forfeiture, and potential for relief against forfeiture.
On 7 April 2020, the National Cabinet announced a mandatory Code of Conduct. The Code only applies to tenants with an annual turnover of up to $50 million that are suffering financial distress or hardship as a result of the COVI-19 pandemic as defined in the Commonwealth Government’s JobKeeper programme. As Queensland has not yet changed its laws surrounding evictions, and the Code does not apply to all tenancies, it is important to understand the current risk that financially struggling businesses face from the laws surrounding forfeiture.
What is forfeiture?
Forfeiture is a method of determining a lease by the lessor retaking possession of the property following default by the tenant of an obligation. Many leases will contain an express forfeiture clause, but if they do not forfeiture can be accessed as a proprietary remedy.
The key aspects of forfeiture to keep in mind are:
1. The tenant must default on a particular kind of obligation
In order for a lease to be forfeited, the tenant must default on an obligation under the lease agreement. Under s 107(d) of the Property Law Act 1974 (Qld), default could include a one-month failure to pay rent or a two-month failure to fulfil other obligations. Importantly, lessors cannot evict tenants pre-emptively or immediately once they default on an obligation and the default must be sufficiently serious to enliven forfeiture laws.
2. If the default is waived by the lessor they cannot later try and claim forfeiture
A lessor may waive any covenant in the lease which serves to benefit them, including the right to forfeiture. This right may be waived by electing to affirm the lease following a breach by the tenant. As a waiver includes anything that affirms a continued desire to uphold the lease, landlords negotiating and agreeing to an altered payment plan may actually waive their right to forfeit. In this regard it is important that all negotiations are reduced to a written agreement.
3. The lessor must comply strictly with procedural requirements if they wish to rely on forfeiture
To properly exercise the right to forfeiture, the lessor must comply strictly with the notice requirements under s 124(1) of the Property Law Act 1974 (Qld). Therefore, the lessor must serve a notice on the tenant that specifies the particular allegation of breach and either requires the tenant the remedy the breach, in some cases, pay compensation. After serving the notice the lessor cannot take any further action until they have given the tenant a reasonable period of time to rectify the situation, which depends on the facts of each situation.
4. The lessor is entitled to take measures such as changing the locks to the property
Once a reasonable period of time has passed and the tenant has not remedied their default the lessor must complete some act that signifies their re-entering and taking control of the property. Lessors commonly change the locks to assert that they have retaken control of the property.
Responding to forfeiture as a tenant
If you have been served a notice of forfeiture from your landlord, it is best to seek legal advice on how to proceed. Depending on the nature of the alleged breach and your potential ability to remedy it, there are many different options that may be suitable. In some cases, a negotiation with the landlord will be sufficient to take actions (such as developing an amended payment plan or agreeing on temporary rent relief) so that you can continue to benefit from the lease agreements. In other cases, it may be more appropriate to apply to the Courts for relief against forfeiture exercised by the lessor under 124(2) of the Property Law Act 1974 (Qld).
The Court has the discretion to grant relief against forfeiture and will look at whether the default was deliberate, the severity of the breaches and the damage caused by the breach. If a tenant has repaid the rent owed and is in a financial position to continue to pay the rent Courts will almost always grant relief against forfeiture, making this a potentially favourable option if your financial instability is likely to be resolved quickly. Traditionally, an order for relief against forfeiture is unlikely if the outstanding rent cannot be paid. However, the discretion of the Court to grant relief against forfeiture is broad and it will be interesting to see if this traditional approach will change in light of the current circumstances.
If you are experiencing financial hardship in your business or need assistance negotiating a lease, please contact David McKewin or Stephanie Forward at Rouse Lawyers on 07 3648 9900.