Originating in feudal times, the common law right of a landlord to seize and impound a tenant’s goods to compel payment of arrears in rent has been abolished in most parts of Australia[i]. The remedy of “distress for rent” is generally considered to be archaic and harsh particularly when the tenant is teetering on the edge of insolvency and those goods could be used to pay (or in fact may be secured to) its creditors.
A landlord cannot hold a tenant or lessee’s goods as security for rent – unless the lease says otherwise. Leases are contractual in nature and, subject to certain caveats (some of which we will outline in this article), the law recognises parties are free to agree on whatever commercial terms they consider appropriate. There is nothing to prevent the parties including a provision to “charge” the tenant’s assets as security for payment of rent and other obligations in the lease and, in fact, such a security interest can, and should, be registered on the Personal Property and Securities Register (the PPSR). However, care must be taken in the drafting of such clauses and your right to enforce will be contested and, potentially, lost if you get it wrong.
What happens when a tenant is in breach of terms under the lease, including being in arrears for rent?
Since Shevill’s Case, commercial leases will invariably provide that paying rent in accordance with the terms set out in the lease – at the set time for the set amount – is an essential obligation of a tenant.
A tenant’s failure to pay rent within a ‘reasonable time’ (such as within 14 or 28 days of being due), will trigger several remedies in favour of the landlord.
If the tenant’s actions amount to repudiation of the lease, the landlord may have an immediate right of termination because that is a common law right rather than a right contained in the lease itself.
Otherwise, a landlord must first issue the tenant a ‘notice to remedy breach’ pursuant to the Property Law Act 1974 before exercising any right to terminate the lease and re-enter the premises. If the landlord wishes to enforce its rights in court, the notice should be in the form prescribed by the regulations – it should:
- be in writing;
- be served on the tenant;
- specify the particular breach complained of;
- specify the amounts claimed, including rent, interest and enforcement costs;
- specify how the breach can be remedied; and
- allow a reasonable time for compliance.
If the tenant fails to remedy the breach within the notice period, the landlord is entitled to terminate the lease and re-enter the premises.
Can a landlord seize and hold a tenant’s possessions?
Notwithstanding that distress for rent has been abolished, in the Queensland Supreme Court case of Van der Velde & Anor v Marklyn Enterprises P/L[iii], the court was asked to consider a provision in a lease by which the landlord claimed a possessory lien, which read:
‘If we terminate this lease by re-entry, we may retain possession of your property until payment of all rent and other moneys payable by you under this lease have been paid in full and you acknowledge that such right of retention shall constitute a legal lien on your property in our favour.’
The tenant argued the clause amounted to distress for rent and was not enforceable on the basis that the doctrine had been abolished in Queensland. The court did not agree and found in favour of the landlord. It held that the clause did not constitute distress for rent because distress is an action which can only be levied ‘during the subsistence of the tenancy’. The provision in the lease provided that the right to retain possession of the tenant’s property did not come into effect until after the landlord had exercised its right to terminate the lease.
This means that such lease provisions are effective to allow a landlord to seize or hold a tenant’s possessions (and even sell them) when the tenant fails to pay rent, provided that the lease is validly terminated before the right is able to be exercised.
As with all security interests, it will be subject to competing prior interests (such as the tenant’s bank or other secured creditors) and you must be mindful of the requirements of the Personal Property and Securities Act 2009 (Cth) if you are to secure your position at the front of the queue when the tenant enters liquidation or bankruptcy.
Speak with our property law experts
A properly drafted lease is essential when it comes to commercial property arrangements. It should cover all major risks and those which are specific to your particular circumstances.
At South Geldard Lawyers our team of property law specialists are experts in the area of leasing, with wide experience drafting and negotiating commercial, retail, rural, industrial and residential property leases. There is no ‘one-size-fits-all’ when it comes to leases – we will customise the document to reflect your property and its existing or proposed use.
If you have questions about specific lease clauses such as the one addressed in this article, call us today on (07) 4936 9100 for an initial consultation.
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[i] Section 103, Property Law Act 1974 (Qld)
[iii] [2005] QSC 239
It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.
