Can a lessee prevent a lessor changing the locks?

When a lessee fails to comply with a notice to remedy a non-payment or other lease default, the lessor may be entitled to terminate the lease and retake possession of the property. This is commonly done by changing the locks.

However, a lessee who wants to save itself from being evicted can apply to court to prevent the lessor from retaking possession. In Queensland this application is made under section 124 of the Property Law Act 1974 (Qld) and is known as an application for relief against forfeiture.

When is relief against forfeiture granted?

Essentially the lessee must establish that it is appropriate in the circumstances for the court to grant relief against forfeiture.

When deciding whether to grant the relief, the court will undertake a balancing exercise of all the circumstances to determine what is fair and equitable.

Relevant factors include:

• What is the nature and gravity of the breach?
• Was the breach inadvertent or wilful?
• Has the default been remedied or will it be remedied?
• Is the lessee willing and able to perform the lease in the future in accordance with its terms?
• What is the damage to the lessor? Can the breach be rectified or can compensation be paid so as to effectively place the lessor in the same position as if performance had been on time or the covenant had not been breached?
• What is the loss to the lessee if relief is not granted?
• Are there any intervening events or third parties involved?

Factors against the court granting relief against forfeiture include:

• The breach has not been remedied or cannot be remedied by the lessee.
• The lessee defaulted wilfully or with deliberate disregard of the lessor’s rights.
• Because of its attitude or financial position, there is a high likelihood that the lessee will default again.
• Where it is likely the lessee is insolvent or will become insolvent in the near future, there is a risk to the lessor that the payments to the lessor may be refundable as a preference payment upon the liquidation or bankruptcy of the lessee.

Recent cases

Courts will grant relief against forfeiture where it is fair to both parties.

In Meridien Airlie Beach Pty Ltd (Receivers and Managers Appointed) (in liq) v Karamist Pty Ltd [2015] QCA 192, the Court granted relief against forfeiture despite the non-payment of rent for a period of two years. The following factors were relevant:

• The lessee had paid the amount owing in full.
• The lessee’s failure to pay was caused by an unusual cash flow difficulty.
• There were no concerns about the lessee’s solvency.
• The lessee agreed to provide an unconditional bank guarantee.

In Baby Zone (Aust) Pty Ltd (Administrators Appointed) v Keira Street Ventures Pty Ltd [2016] NSWSC 528, the Court granted relief to the lessee despite it being in voluntary administration and its questionable solvency. The following factors were relevant:

• The lessee had remedied the late payment of rent.
• The administrators of the lessee proposed to sell the business to a third party.
• The proposed purchaser, who was also the proposed assignee of the lease, was solvent and likely to be able to meet the obligations under the lease.
• The lessee’s principal was willing to furnish a personal bank guarantee equivalent to three months’ rent to secure the assignment of lease to the third party.
• The lessee’s principal provided a personal guarantee for 15 months’ rent in accordance with the terms of the lease.
• Forfeiture of the property would prejudice the lessee’s creditors in the event of a winding up.

Comments

If you are the lessee you will have to demonstrate that the genuine interests of the lessor will be protected if relief is granted.

A lessor seeking to terminate a lease will need to comply with the applicable legislation relating to the lease, including the proper service of any notice to remedy breach.

Where the lessee is in voluntary administration or administration may be imminent, the lessor will need to be aware of the voluntary administration provisions in Part 5.3A of the Corporations Act 2001 (Cth).

For example, where the lessee is in voluntary administration the lessor is prohibited from taking possession of the premises during the administration period except with the administrator’s written consent or the leave of the court.

The moratorium provisions do not prevent the lessor from issuing a notice to remedy breach and notice of termination if the default is not remedied.

A lessor should obtain advice if an administrator is seeking to sell the lessee’s business with a transfer of the lease or where a deed of company arrangement (DOCA) is proposed by the lessee.

A DOCA binds all creditors, including lessors so far as it concerns claims arising on or before the date specified in the DOCA. It is rare for a lessor to vote in favour of a DOCA and it would be prudent for a lessor to obtain legal advice concerning a proposed DOCA before voting.

If you would like more information about these issues please contact Graham Roberts on +61 7 3231 2404 or Lara Dawson on +61 7 3231 2566.