What happens when a retail or commercial tenant breaches a lease in Victoria?

Kara Inglese

LawyerAitken PartnersView Profile

Retail and commercial leases are legally binding agreements for exclusive use by a tenant of retail or commercial premises, setting out the rights and obligations of landlords, tenants and often, guarantors. Serious consequences my apply if a tenant breaches provisions of a retail or commercial lease, including facing financial penalties, lease termination, recovery proceedings against both the tenant and guarantor or legal disputes.

In Victoria, commercial leasing disputes are commonly governed by (without limitation):

• the lease agreement itself;
• for retail premises, the Retail Leases Act 2003 (Vic) (Retail Leases Act);
• the Property Law Act 1958 (Vic) (Property Law Act); and
• common law interpretation of the legislation.

Some, but not all provisions of the Property Law Act can be excluded by the Lease. The Retail Leases Act, if it applies, will override the lease if there is any inconsistency.

Landlords should understand their rights in order to protect their interests and avoid costly litigation in the event of a breach of lease by their tenant.

What is a breach of a retail or commercial lease?

When a tenant fails to fulfill their obligations under a lease, they are considered to have breached their lease. Typical examples of a breach of lease by the tenant include:

• a failure to pay rent and outgoings;
• subleasing without the landlord's consent;
• using the premises for an purpose not authorised by the landlord;
• failure to make good, repair or maintain the premises;
• damaging the premises and/or other parts of the landlord's land; and
• abandoning the premises prior to the expiry of the lease.

The gravity of the breach and the landlord’s prospects of a suitable remedy depend on the provisions contained in the lease and the relevant legislation.

Retail leases vs non-retail commercial leases

Retail leases are treated differently to commercial non-retail leases in Victoria due to the Retail Leases Act. Whether the lease is retail or non-retail can affect the way breaches and disputes are handled.

Premises are classed as “retail premises” under section 4(1) of the Retail Leases Act if they are used wholly or predominantly for the sale or hire of retail goods, the provision of retail services, or the carrying on of a specified business determined by the responsible Minister. The Victorian courts have interpreted the definition under the Retail Leases Act broadly. Section 4(2) also excludes certain premises, such as leases where:

• the occupancy costs (generally, rent and outgoings) exceed $1 million per annum excluding GST;
• the tenant is a listed corporation under the Corporations Act 2001 (Cth), a body corporate listed on a member of the World Federation of Exchanges, or a subsidiary of such corporation or body corporate;
• the premises are wholly or predominantly used for a business operated by the tenant on behalf of the landlord as the landlord's employee or agent; and
• the premises are wholly or predominantly used for a specified business, class of premises or class of tenants determined by the responsible Minister to be excluded.

There are a number of exclusions under Ministerial determinations, such as barristers chambers, premises for retail services above the first three storeys of a building, some 15 year leases, amongst others.

Generally, commercial leases include leases which do not fall under the definition of a retail premises under the Retail Leases Act. Examples include storage, farming and industrial leases. However, care should be taken, as the courts have determined that seemingly non-retail uses still fall under the definition. Refer to our earlier article on this subject here.

The Retail Leases Act provides protection for tenants and imposes procedural obligations on landlords, such as disclosure obligations, maintenance and repair standards, minimum lease terms, assignment procedures, security deposits and dispute resolution methods. On the contrary, commercial leases are governed primarily by the lease terms and common law principles.

What are a landlord's obligations and risks when terminating a retail or commercial lease following a tenant breach?

As non-retail commercial leases are primarily governed by the lease itself and common law, prior to seeking enforcement actions, landlords should carefully review the lease terms, the nature of the alleged breach and ensure that they still comply with all legal requirements and adhere to any statutory obligations.

For a retail lease, the same considerations apply, subject to any additional requirements of the Retail Leases Act, such as dispute resolution procedures.

Before a landlord terminates either a retail or commercial lease for a breach by the tenant, under sections 146 and 198 of the Property Law Act 1958 (Vic) and any relevant provisions of the lease, landlords are generally required to serve written notice on the tenant:

• specifying the details of the breach;
• requesting the breach be remedied within a reasonable specified timeframe (deemed to be a minimum of 14 days, or as otherwise specified by the lease); and
• potentially seeking compensation for the breach.

A landlord should follow this notice procedure and ensure the necessary timing requirements are adhered to before taking any action to enforce termination and re-enter the premises. Otherwise, the landlord risks a claim by the tenant that the purported termination was invalid, potentially resulting in costly litigation or disputes.

As the form of notice and timing requirements are crucial to the landlord's ability to enforce their rights under the lease, we recommended the notices are prepared by a legal practitioner, and we can assist with such notices.

One of the most common breaches of a retail or commercial lease is the non-payment of rent. If this occurs, landlords may be able to take further actions (after service of the correct notice) such as:

• seeking recovery of unpaid rent;
• charging default interest;
• drawing on a bank guarantee or security bond;
• terminating the lease;
• repossessing the premises;
• recovering any legal costs; and
• commencing debt recovery proceedings if necessary.

However, if a landlord wrongfully terminates their tenant’s lease, they can be exposed to substantial damages claims, including claims for:

• loss of commercial business;
• unlawful eviction;
• reputational damage; and
• breach of contract.

For this reason, landlords should contact us before taking any termination measures, even prior to issuing termination notices.

What are a tenant's rights and remedies if their retail or commercial lease is terminated?

Under section 138 of the Property Law Act 1958 (Vic), tenants are not to be prejudiced, and a landlord generally cannot enforce termination of the lease for non-payment of rent unless the required notice has first been provided.

If a retail or commercial tenant faces termination of their lease by their landlord, they may dispute:

• whether a breach has actually occurred under the terms of the lease;
• whether the landlord has provided proper notice of the tenant’s purported breach in compliance with the requirements noted above;
• whether the breach, if one has occurred, is sufficiently serious enough to give the landlord the right to terminate the lease; and
• whether the landlord was compliant and lawful in terminating their lease.

Tenants may also apply to the Court to seek relief against forfeiture (have their lease reinstated) after facing termination in some circumstances, particularly where the breach can be remedied and the tenant is willing to comply with the ongoing lease obligations. Courts will often grant such relief where appropriate, although they usually require the tenant to remedy the breach as a condition of reinstatement.

What happens if a retail or commercial leasing dispute arises?

If a dispute arises between retail and commercial landlords and tenants, there are a number of avenues to resolve the dispute. Retail leasing disputes in Victoria may be referred to the Victorian Small Business Commission (VSBC) for alternative dispute resolution under the Retail Leases Act. Commercial lease parties can also elect to seek alternative dispute resolution avenues such as mediation or arbitration. Often retail and commercial leases have dispute resolution clauses requiring the parties to first try such methods. Alternative dispute resolution can provide a quicker and less costly outcome for parties.

If disputes are not resolved through mediation or arbitration, proceedings may be commenced in VCAT (for retail leases, subject to the comments below) or the courts (for non-retail leases), depending on the matter at hand. Proceedings cannot be commenced in VCAT for a retail tenancy dispute under the Retail Leases Act unless the VSBC certifies that the dispute cannot be resolved by alternative dispute resolution, unless the dispute solely relates to non-payment of rent. There are also likely time limitations for actions and claims so seeking advice early is recommended.

Contact our Property Team for assistance and advice

Whether you are a landlord seeking to enforce a lease or a tenant responding to an alleged breach, obtaining timely legal advice is essential.

Our Property Team can advise in relation to all aspects of retail and commercial leasing matters, including assisting with breach notices and dispute resolution.

Contact our office today on 03 9600 6000 to speak to our friendly property team to discuss your situation.