Hypothetical by Manny Wood published in the Coffs Coast News Of The Area on 19 November 2021.
Paul enters a commercial lease with VK Holdings. Paul agrees to 3 year term with options to renew.
After 9 months Paul is struggling with cash flow. For the past few months, he has managed only partial rent payment and had been unable to pay any rent for the last fortnight.
Paul pleads with VK Holdings that he intends to honour the lease and repay monies owed, as he is trying to offload stock and is looking to get an investor onboard.
However, VK Holdings relies on a clause in the lease agreement that provides ‘the lessor can terminate the lease if the lessee is 14 days late in rent payment’.
VK Holdings terminates the lease and begins legal proceedings to recover unpaid rent and outgoings plus damages until the lease end date totalling $74,000.
In Court Paul argues that as he intended to honour the lease, and as it was the lessor who terminated the lease, he should only be liable to repay the outstanding amount owing at the date of termination being $12,000.
The Court finds in favour of Paul, stating ‘a lessor cannot recover the loss which it sustains as a result of its own act to terminate and as such the loss which can be recovered by the lessor is limited to the loss which flows from the lessee’s breach’, thus dismissing the claim for additional damages sought post the termination date.
If VK Holdings had sought legal advice in the preparation of the lease the solicitor may have recommended the ’14 days’ clause clearly state that it was an ‘essential term’, which if breached by the lessee, would allow VK Holdings to seek damages until the lease end date.
It is important to seek legal advice when entering into lease agreements and contracts.
Thank you to Anthony Fogarty for his assistance with this column. If YOU would like a particular issue addressed, please email me at manny@tblaw.net.au or call me on (02) 66 487 487.
