Accepting rent after default period – a common pitfall for commercial landlords

A recent VCAT decision has underlined the care that needs to be taken by landlords and their managing agents in invoicing for rent where a default notice has already been issued to a tenant.

The case of Brightgreen Pty Ltd v Marcott Pty Ltd (Building and Property) [2020] VCAT 632 deals with whether a landlord waives their rights under a default notice by invoicing for rent beyond the end of the default period. While not breaking any new legal ground, it provides a timely reminder of existing obligations for landlords of commercial leases.

The Facts in Brightgreen

In Brightgreen, the landlord issued a default notice on 9 April 2020. The default period under the notice ended on 23 April 2020. Following an injunction, the matter was set to be heard by VCAT in June. However, during this interim period the landlord invoiced the tenant for rent for the months of May and June. The tenant subsequently paid rent as invoiced.

The tenant then sought a further hearing on the basis that the landlord had waived their rights to end the lease under the default notice on the basis that the landlord, by continuing to charge rent, had made an irrevocable indication that the lease was on foot.

The Waiver Principle

The underlying principle in these cases is that a landlord has the right, following a breach by a tenant, to either treat the lease as forfeit or as remaining in force. Where the landlord’s actions unequivocally indicate to a tenant that they have chosen one of those options, they will be deemed to have irrevocably made that decision. As per the English case of Central Estates (Belgravia) Ltd v Woolgar (No 2), “if at the time of the act he (the landlord) had a right to elect whether to forfeit the lease or tenancy or to affirm it, his act will unequivocally demonstrate that he has decided to affirm it.”

The issue of whether a landlord has elected to continue a lease most commonly presents itself where a landlord continues to invoice a tenant for rent beyond the date of the breach, despite having issued a default notice. By invoicing for rent, the landlord is deemed to have made an affirmation of the lease and has consequently waived their rights set out in the default notice. The underlying rationale is that a landlord cannot reasonably claim both that the lease is at an end and that rent is owed.

The period for which rent may actually be invoiced is set out in the Victorian Supreme Court case of Alliswell Pty Ltd v Macdav Pty Ltd. This ruling is worth quoting at length and decided that “where a Lessor accepts rent after the date of a breach of the lease by the Lessee, the question whether this amounts to a waiver of the right of re-entry for that breach will depend upon whether the rent fell due before or after the breach. If the rent fell due after the breach, its acceptance is taken at common law to be a waiver because it is an unequivocal assertion that the lease is on foot. If it were not on foot the rent would not have fallen due and the Lessor would have had no entitlement to demand or accept it. Where, on the other hand, the rent fell due before the right of re-entry arose, then its acceptance without more cannot amount to a waiver because the rent was and remained due and payable as a debt to the Lessor.”

On this basis, rent can only be invoiced up until the date that the right of re-entry arises.

The inverse of the waiver principle is that an act of a landlord can unequivocally end the lease. In Victoria, this is most easily accomplished by issuing a notice of re-entry and re-entering the premises (assuming the landlord has not already forfeited their right to do so by invoicing for subsequent rent).

The Result in Brightgreen

In Brightgreen, the landlord was found to have affirmed the lease as they had continued to issue rent invoices for a period beyond the date at which the right to re-entry arose. As such, they had waived their rights under the default notice.

Practically, landlords should be careful not to invoice rent beyond the end of the default period set out in the default notice, lest they unintentionally lose their right to re-enter the premises. A landlord using an agent to manage their tenancy should also take care to ensure that any agent is aware of the default notice and knows not to issue invoices. It is common for managing agents to continue to charge rent after the default period (this was the case in Brightgreen). It is no defence to the waiver principle that invoices were issued by a managing agent and not the landlord personally.

If you have questions in relation to this or any other leasing issue, please do not hesitate to contact Eastern Bridge.

Jack Kelly

Lawyer