Invalid cancellation of lease

by | May 27, 2011 | General property Law, Leasing

Lessors are encouraged to take a lot of care and attention when cancelling leases under the Property Law Act 2007. The Supreme Court’s decision on 10 May 2011 in Ingram & Knee v Patcroft Properties Limited shows that care and attention is very important.

The lessor was held liable to pay damages to the lessee for loss of their businesses as they incorrectly cancelled the lease and then unlawfully excluded the lessee from the premises.

The lease provided that rent needed to be paid in advance on the first day of each month and the lessor had a right of re-entry for non-payment once rent was in arrears for 14 days.

In April 2005 rent had been short paid and a balance of $2249 was owing. On 1 June rent and operating expenses of $36,783.75 fell due. On 1 June the sum of $10,191.00 was paid by the lessee. A further payment of $4,000 was made on 13 June.

The lessor conceded at trial that the 1 June payment met the April shortfall first and so it was the June payment that was still owing. The lessee also had a claim for more than $36,000 against the lessor, as they had overpaid their lift maintenance contribution. However the lessee was obliged to pay the rent without deduction.

The lessor entered the premises on the morning of 14 June. They changed the locks and served a notice of re-entry, a trespass notice and a notice of distraint. (Distraint was obviously unlawful because it was proceeded by the re-entry; distraint is also no longer relevant under the Property Law Act 2007.) On the same day the lessor’s solicitor wrote to advise that the lessor had re-entered and terminated the lease and stated that any attempt by the lessee to seek relief would be defended.

The 14 days under the lease did not expire until the end of 14 June i.e. the lessor could re-enter on 15 June if the June balance remained outstanding, not before. The lessor jumped the gun.

The lessee did not accept the re-entry. They reserved their position. Nothing much happened for 1 year.

Then on 11 September 2006 the lessor’s solicitor made a claim against the lessee for damages. The lessee responded with their own claim for damages.

The Supreme Court held that the lessor’s action in unlawfully excluding the lessee from the premises on 14 June was a repudiatory breach. It was a continuing breach capable of acceptance and cancellation by the lessee. The lessee had not accepted the repudiation initially. They had reserved their position. Because the lessor had repudiated, the lessee could not operate their businesses. The non-payment of rent by the lessee, subsequent to the unlawful re-entry, was therefore justified. The lessor tried to argue that as the rent had remained unpaid they had and could rely upon this as having given them a right to cancel. This was not accepted by the court. The lessor had got it wrong and could not rely on a later breach to make their wrongful action right.