To terminate or not to terminate?
September/October 2017 edition

You’ve heard it a hundred times – a potential tenant dreams of running a small shop and living upstairs. It sounds idyllic for the tenant, but for the agent the complexities of managing a mixed-use tenancy can be anything but.

By Robyn Hobbs OAM - NSW Small Business Commissioner

Legal action can cost an arm and a leg and leave you without the desired outcome. Here are some tips to help you get it right, both before a dispute occurs and when you think you might need to terminate.
Know the (legal) lay of the land
Once you’ve found a tenant and resolved any planning considerations, the next step is to identify the type of tenancies the tenant proposes, as different rules may apply. The three main types of leases to understand are residential, retail and commercial.

A residential lease is for the occupation of premises as a residence and is governed by the Residential Tenancies Act 2010.

Retail leases fall under the Retail Leases Act 1994 and are defined as a lease for premises to be used for a retail business, restaurant or takeaway. If a lease is for a retail use listed in the Retail Leases Act, or it is for another sort of use but is located in a shopping centre, it can be governed by this Act.

There are a few limited exceptions to both residential and retail leases, including very short or very long leases. Premises for most other commercial uses are covered by commercial leases and don’t have an Act that is specific to them. While the lease is the first place to look for the terms of the deal, each type of lease has its own set of rules.

Termination for breach
You decided to give the tenant two separate leases to have certainty about how to manage the relationship. Unfortunately, things are going wrong and you’re thinking of terminating.

If the tenant is breaching one or both of the leases, apart from failing to pay rent, there are distinct processes to follow.

For the retail premises, look to the lease terms to understand termination rights. Also ensure you comply with the Conveyancing Act 1919 by providing a sufficient default notice, which gives the tenant reasonable time to remedy the breach. After this, you can re-enter the premises if the tenant doesn’t comply.

With the residential lease, you can issue a termination notice giving the tenant 14 days’ notice to rectify the breach and then apply for a termination order from the NSW Civil and Administrative Tribunal (NCAT). NCAT considers a range of factors in deciding whether to terminate, including the personal situation of the tenant and whether these justify a termination.

Termination for defaulting on rent
If the tenant stops paying under the retail lease, the contract is likely to say how far in arrears they must be before you can terminate without notice. If the lease is silent on the issue, speak to a lawyer before locking the tenant out to make sure you comply with the law. 

If the tenant defaults on rent for the residence, you can issue a notice when the tenant is two weeks in arrears, giving them two more weeks’ notice of termination. If the tenant doesn’t comply, you can apply to NCAT for a termination order. The time it takes to terminate a residential lease can be extended as NCAT may suspend the order for possession for one to four weeks, or even longer.

It’s important to remember that the landlord cannot simply change the locks on a residential tenant. This carries a hefty penalty. Instead, to take possession, the sheriff must be engaged.

Challenging a termination
For both types of leases the tenant can try to prevent the lockout or be let back in.

A retail tenant can apply to NCAT for an urgent interim order called “relief against forfeiture”. When deciding whether to grant relief, NCAT will consider the circumstances of the case and the ability of the tenant to pay.

In residential, the tenant can put their case when the landlord seeks the termination order. For rental arrears, if they pay or comply with a payment plan then the order cannot be made. Even if a termination order is made, the tenant may still be allowed to remain if they pay up.

Should you terminate?

You might think you have a right to terminate, but that doesn’t mean you should. First, consider whether negotiating a resolution might result in a better outcome for the landlord, the tenant and you. 

If the tenant is in breach in one premises but not the other, you might want to consider the future of the relationship. For example, if one lease is lucrative you might not want to ruin the relationship by terminating the other lease. 

Consider why the tenant is in breach or has stopped paying rent? Are they involved in a separate dispute? Are they going through a downturn but might be able to recover? Or are they just going broke?

Look at your options based on the reason the tenant stopped paying rent or is in breach. There could be a more economical solution that enables you to resolve the dispute and get them to pay or comply. Contact the Dispute Resolution Unit at the Office of the NSW Small
Business Commissioner to talk about your options.

If their business is just going through a rough patch, consider a rent reduction instead, which could save the landlord in the long run. This eliminates the costs associated with finding a new tenant, having an empty shop and defending any legal challenges, not to mention the hassles of sorting out the ‘make good’ yourself and dealing with any goods left behind.

If the tenant’s business has failed or they are broke, then ending the relationship could be the best option, but before terminating, consider negotiating an exit. This could maintain your relationship with the tenant if they continue in the other lease. Moreover, it will save legal costs and helps to avoid disputes over the make good, the tenant’s property or over claims you make on the bond or bank guarantee.

If, after careful consideration, you decide you need to terminate, it’s important to understand the different frameworks, and if you want to terminate both tenancies, to carefully plan both of them. 
“Consider why the tenant is in breach or has stopped paying rent – are they involved in a separate dispute? Are they going through a downturn but might be able to recover? Or are they just going broke?”
For more advice on the Retail Leases Act, contact the Dispute Resolution Unit at the Office of the NSW Small Business Commissioner on 1300 795 534, or contact NSW Fair Trading about the Residential Tenancies Act on 133 220.