The payment of rent and other outgoings is an essential obligation under almost all commercial leases. The latest form of the Auckland District Law Society’s commonly used Deed of Lease (Sixth Edition 2012 (4)) provides that a failure to make these payments is “a breach going to the essence of the Tenant’s obligations under the lease.” Due to the “essentiality” of these payments, the tenant is required to compensate the landlord and the landlord is entitled to recover damages for a default in payment. However, while being exposed to additional damages is certainly a concern for any tenant that finds itself in default, the likely more pressing issue for a tenant is whether their default will give cause to the landlord to cancel the lease.

In terms of cancellation, the first time frame to be aware of is an initial 10 working day period of unpaid rent. If the rent has been in arrears for 10 working days after the due date for payment, the landlord may serve upon the tenant a notice of intention to cancel the lease (“PLA notice”). Importantly, to be a valid PLA notice the notice must strictly comply with the requirements of section 245 of the Property Law Act 2007. There are five matters which the PLA notice must adequately inform the tenant of:

(a) the nature and extent of the breach complained about;

(b) the amount that must be paid to remedy the breach;

(c) the period within which the breach must be remedied (which must not be less than 10 working days after the date of service of the notice);

(d) the consequence that, if the breach is not remedied at the expiry of the notice, the lessor may seek to cancel the lease; and

(e) the right to apply to court for relief against cancellation, and the advisability of seeking legal advice on the exercise of that right.

If the PLA notice does not meet the above requirements, it can be considered invalid and the landlord would not be in a position to cancel the lease. Assuming however that a valid PLA notice has been given, the landlord may, at the expiry of the PLA notice, cancel the lease by peaceably re-entering the premises or applying to a Court for an order for possession of the land. While cancellation effectively terminates the term of the lease, this termination will be without prejudice to the rights of either party against the other, including the landlord’s entitlement to recover damages noted above.

To remedy the breach, the tenant must pay the amount stated in the PLA notice by the expiry date. It is important to keep in mind however that the acceptance by the landlord of payment of rent arrears does not constitute a waiver of the tenant’s continuing “essential” obligation to pay rent. The landlord is fully within its rights to issue another notice as soon as rent is in arrears for 10 working days.

If you are not in a position to remedy the breach by the expiry date, it is strongly recommended that you seek legal advice to consider the full range of options available to you for responding to the landlord. While cancellation is certainly a reality that you may face, landlords will often be accommodating to some form of proposal that delays the full payment of arrears to some future date provided that the tenant continues to meet certain conditions. In this situation, lawyers can help present a proposal that both tenant and landlord may consider mutually beneficial.

This post was published in the FMCG Business magazine.