Cancellation of Commercial Leases - Getting the Process Right

Rosie Clark

This article appeared in the Otago Daily Times, June 2016.

The High Court has been centre stage again for a long running dispute over the commercial lease for a property in Grafton Road, Auckland. The landlord and tenant have been involved in lengthy litigation concerning various issues arising in respect of the lease. This instalment focussed on the attempted cancellation of the lease.

The Property Law Act sets out rules about when a landlord may cancel a lease, the process that must be followed, and how a tenant can apply to the court for relief against cancellation. This case touches on all those points.

The landlord and tenant entered into the lease in 2011. At that stage the premises comprised a dilapidated villa that the landlord did not have the funds to renovate. In return for a three year rent holiday, the tenant was supposed to renovate the villa.

Earlier instalments of the litigation concerned the attempted cancellation of the lease by the landlord on the basis that the tenant was in breach of the lease for not completing the required renovation work. At various stages the Court agreed that the tenant was in breach of the lease but considered that the tenant was entitled to relief from cancellation. This more recent instalment concerned the non payment of rent and outgoings, and attempted cancellation of the lease.

The Property Law Act gives landlords two methods for cancelling a lease where the tenant is in breach. A landlord may either apply to a court for an order for possession of the land, or re-enter the land peaceably (and without committing forcible entry under the Crimes Act). The latter option will always pose difficulties for a landlord where a tenant is not being cooperative.

Before a landlord may cancel a lease for non payment of rent, the rent must have been in arrears for not less than ten working days and the landlord must have given the tenant notice of their intention to cancel the lease. The notice must give the tenant a reasonable amount of time (not less than 10 working days) to remedy the breach. If the breach has not been remedied (usually by paying the outstanding rent) within that time frame, then the landlord may cancel the lease. The Property Law Act sets out all the matters that the landlord’s notice must address. Among these matters is the requirement to advise the tenant that it has the right, under the Property Law Act, to apply to a court for relief against cancellation of the lease, and the advisability of seeking legal advice on the exercise of that right.

Where the breach of lease consists solely of a failure to pay rent, a Court is likely to grant relief against cancellation, provided that the tenant pays all of the arrears and the landlord’s legal costs. However, in situations where it is clear the tenant is hopelessly insolvent, as a general rule the Court will not grant relief.

In this case, the tenant had failed to pay rent for two consecutive months. However, by the Court date, the tenant had paid these arrears, and as such, the Court granted the tenant relief against forfeiture and denied the landlord’s application for an order for possession of the property.

The unsuccessful party to court proceedings is often ordered to make a contribution to the successful party’s legal costs. The Judge in this case noted that “although the respondent has been successful in resisting the order for possession, and has obtained an order for relief against forfeiture, its own actions have really been the cause of yet a further application having to be made to the court. The last payment, in fact, appears to have been made on the day that the applicant’s submissions for the purposes of the hearing before me were filed”. In those circumstances, the Judge decided not to make an order for costs, so the landlord was not required to contribute to the tenant’s costs.

Unfortunately this can put a landlord in a difficult position, if it has to regularly file court proceedings in order to encourage a tenant to pay rent. In this case the Judge indicated that there was further litigation in the pipeline. It will be interesting to see how tolerant the Court will be if the tenant continues to amass rental arrears which are only paid on the issue of court proceedings.