Terminating a lease when a tenant is in default can be tricky. The course of action a landlord takes to terminate a lease may depend on a number of factors, including the terms of the lease and the desired remedy. Below, we outline some considerations a landlord should bear in mind when choosing to end a commercial tenancy agreement.
STEP 1 Read the lease!
A lease should outline the landlord’s termination rights and when the tenant’s conduct amounts to default. The lease should also specify the notice requirements that a landlord must observe before seeking a remedy such as re-entry, distraint or litigation.
When the lease does not grant a landlord a right of termination, or in situations where there is no written lease, a landlord must exercise greater caution as the right of the landlord to terminate is not automatic. The landlord may have to seek a court order to end the landlord-tenant relationship.
STEP 2 To terminate or not to terminate?
Generally, if a tenant is in default, the landlord may choose from the following options:
• Distress A landlord may keep the lease alive and seize a tenant’s property to compel payment for rent that is in arrears. A landlord that chooses this course of action cannot refuse a tenant access to the premises and may not take action for possession of the property so long as the distrained goods are in the landlord’s possession. A landlord should be cautious in exercising this remedy as a tenant may sue for wrongful conversion, trespass to goods, or punitive damages.
• Sue for rent as it accrues due A landlord may continue the lease but commence litigation to collect rent as it becomes due. This option allows the landlord to seek contribution from a guarantor whose guarantee might otherwise be extinguished or impaired if the lease was terminated.
• Relet the premises on behalf of the tenant The landlord may relet the property on the tenant’s behalf and credit all rent collected to the amounts owing by the tenant under the lease. A landlord must first serve a Notice of Entry to Relet before exercising this option. The terms of the relet must not exceed the terms of the original lease.
• Terminate the lease and sue for damages A landlord may be able to terminate the lease and commence an action for unpaid rent to the date of the termination, accelerated rent (if stipulated in the lease), and/or prospective rent. When claiming for prospective rent, a landlord must make every effort to mitigate the loss.
STEP 3 Notice requirements
A landlord that has decided on a course of action must serve appropriate notice on the tenant in accordance with the lease and any applicable legislation. Courts will strictly enforce notice requirements so it is imperative that a landlord adhere to the terms of the lease and ensure notices are properly served. A landlord should also be aware of any subtenants or assignees that may also have to be served.
Varying notices may have to be served depending on the remedy sought by the landlord. A landlord may be required to first serve a demand for rent before a Notice of Termination can be served. A Notice of Termination may also have to be followed by a Notice to Quit and/or a Demand for Possession before a landlord may re-enter the premises. Further, the courts have held that to preserve the right to claim for future rents due, the landlord must give a tenant express notice that prospective rents will be sought.
STEP 4 Stay consistent!
A landlord that has opted to terminate a lease must make sure that all subsequent actions it takes are consistent with its chosen route of termination. For instance, to accept rent from the tenant after the purported termination may be viewed by the court as inconsistent with the intention to terminate. A landlord must make its intentions clear and act accordingly.
Whatever course of action a landlord chooses when seeking to terminate a commercial lease, it is vital that the landlord adheres to the terms of the lease. In particular, a landlord must serve required notices in accordance with the law and the lease. Furthermore, a landlord must also exercise care prior to and after it commences termination so that it avoids potential pitfalls along the way. A well-drafted lease that clearly sets out rights of termination can save a landlord a great deal of headache when dealing with a commercial tenant in default.
For more information on commercial leases and commercial property law in general, please contact
Alana Dale-Johnson......................adale-johnson@singleton.com
Carmen Hamilton..........................chamilton@singleton.com