Jacqui Nicholl

The Property Law Act 2007 (Act) provides a “code” governing the cancellation of a lease by the lessor (Landlord) for breach of covenant or condition by the lessee (Tenant). The “code” is contained in sections 244 to 246 of the Act (Cancellation Code). The codification of the lease cancellation provisions of the Act means that, on breach of a covenant or condition by the Tenant, the Landlord may only cancel a lease in compliance with the requirements of the Cancellation Code. Landlords and Tenants cannot contract out of the Cancellation Code. Any Lease containing terms which are inconsistent with the Cancellation Code, or which attempt to avoid the provisions of the Cancellation Code, are ineffective and unenforceable. The Cancellation Code provisions of the Act must be strictly followed if a lease cancellation is to be deemed lawful. A Landlord who fails to follow the statutory procedure when cancelling a lease is exposed to the risk that the Tenant challenges the cancellation and seeks relief against the Landlord. In this article we summarise the statutory notice requirements contained within the Cancellation Code. These requirements must be complied with by the Landlord when exercising a right to cancel a lease for breach by the Tenant. When a Landlord’s right to cancel may be exercised In the event of a breach of the lease provisions by the Tenant, the Landlord may exercise a right to cancel a lease by: applying to the court for a possession order of the land; or re-entering the premises peaceably and without committing forcible entry under section 91 of the Crimes Act 1961. However, before exercising a right to cancel, the Landlord must first comply with the Cancellation Code. Section 245 – Cancellation of lease for breach of covenant to pay rent If the Tenant is in breach of their obligation to pay rent then the Landlord may exercise a right to cancel the lease only if: the rent has been in arrears for at least 10 working days; the Landlord has served on the Tenant a notice of intention to cancel the lease for breach of the obligation to pay rent (s245 Notice); and at the expiry of the notice period specified in the s245 Notice, the breach has not been remedied. The s245 Notice must “adequately inform” the Tenant (or other recipient) of the following: the nature and extent of the breach; the amount that must be paid to remedy the breach; the period within which the breach must be remedied, being not less than 10 working days after the date of service of the s245 Notice (remedial period); the Landlord’s right to cancel the lease if the breach is not remedied within the remedial period; and the Tenant’s right to apply to a court for relief against cancellation of the lease and that the Tenant should seek legal advice on the exercise of that right. “10 working days” There are two periods of 10 working days referred to in section 245: the first is the period for which rent must be in arrears before the Landlord can exercise a right of cancellation for non-payment of rent; and the second is the minimum period that the Tenant must be given under the s245 Notice to remedy the breach. Importantly, section 245 allows the two 10 working day periods to run concurrently. Before exercising a right to cancel a lease under section 245, it is important that the Landlord check the specific terms of the lease. The statutory power to cancel a lease for non-payment of rent, or other breach, implied into leases by the Act requires that rent must be in arrears for at least 15 working days before the Landlord can exercise the right to cancel. However, if the lease contains an express provision entitling the Landlord to cancel the lease for non-payment of rent earlier than the implied 15 working day period, the express provision prevails. Most standard form leases specify a rent arrears period of 10 working days after the date the rent payment was due. Section 246 – Cancellation of lease for breach of other covenants If the Tenant is in breach of a condition or covenant in a lease other than the covenant to pay rent, for example failing to adequately maintain the premises or remove rubbish, the Landlord may exercise a right to cancel the lease only if: the Landlord has served on the Tenant a notice of intention to cancel the lease for breach (s246 Notice); and at the expiry of a period that is “reasonable in the circumstances”, the breach has not been remedied. The s246 Notice must “adequately inform” the Tenant of the following: the nature and extent of the breach; if the Landlord considers the breach is capable of remedy by the Tenant doing or stopping doing a particular thing, or by the Tenant paying the Landlord reasonable compensation, or both:            - the thing the Tenant must do or stop doing; or            - the amount of compensation the Landlord considers reasonable; the Landlord’s right to cancel the lease if the breach is not remedied within the expiry of a period that is “reasonable in the circumstances”; that certain defects in the s246 Notice do not invalidate the notice; and the Tenant’s the right to apply to a court for relief against cancellation of the lease, and that the Tenant should seek legal advice on the exercise of that right. “Reasonable in the circumstances” The s246 Notice must give the Tenant a period of time that is “reasonable in the circumstances” to remedy the breach. However, the Cancellation Code does not require the Landlord to specify in the notice what that period will be. To give certainty to both parties, we recommend a date be specified in the s246 Notice. What constitutes a reasonable period of time will depend on the circumstances of the matter and the ‘thing’ that the Tenant must do, or stop doing, to remedy the breach. Because of the potential ambiguity around what a reasonable period will be – what one party considers reasonable may not necessarily be considered reasonable by another – we recommend careful consideration be given to each matter and its specific circumstances. We can provide case-specific advice in this regard. “Adequately inform” Both sections 245 and 246 require that any notice given by a Landlord to a Tenant must “adequately inform” the Tenant of what the breach is, how the breach can be remedied (if at all) and, in respect of an s245 Notice, the date by which the breach must be remedied. The primary purpose is to give the Tenant an opportunity to remedy the breach and to put the Tenant on notice that, if the breach is not remedied, the lease will be cancelled. Care must be taken in preparing an s245 or s246 Notice to ensure that the notice is compliant with the Act and accordingly can be acted on immediately, if required, without the need for further notice or time to be given. Service As the Landlord’s right to cancel a lease for breach stems from the provision and expiry, without remedy, of an s245 or s246 Notice, it is imperative that any notice is effectively and validly served on the Tenant (and other relevant persons/parties if required), in compliance with the provisions of the Act. Failure to adequately serve a notice could result in the notice being unenforceable, or open to challenge by the Tenant, meaning wasted time and costs for the Landlord. We can provide advice on, and arrange for service of, s245 or s246 Notices to ensure compliance with the Act. Any notice issued under sections 245 or 246 of the Act must comply with the Cancellation Code, the notice must be correctly drafted and adequately served. A prudent Landlord should strictly comply with this ‘first step’ to ensure the swift and effective cancellation of a lease in order to save time and costs, and to minimise any loss going forward. We can provide advice in all areas of the Property Law Act and the Cancellation Code.

New Zealand’s growing living costs, rising interest rates and declining business confidence means business are likely to experience an increase in their debtors in the coming months. Given the choice between paying a mortgage or rent and paying an outstanding invoice for services/goods already received, those struggling financially will likely chose to keep a ‘roof over their head’ rather than pay an invoice for something they already have. So, if your are in business and your are owed money, what can you do? Act fast. Generally, if a customer has the money to pay your invoice – and has no issue with the service provided or the invoiced amount – they will pay your invoice when due. Failure to pay without any communication from your customer is a warning sign. As soon as an invoice becomes overdue, contact your customer. While sending overdue invoice reminders or statements may be what your accounts system automatically does, these are easy to ignore. Direct contact is not. In the first instance we recommend making a phone call to your customer and talking to them about the invoice, noting it has not been paid, and requesting payment. It may be during this phone call that the customer raises any issues they have with the invoice or service provided. You should discuss any issues with the customer and agree to a resolution (if appropriate). Follow the phone call up with an email recording what you discussed and that you expect payment of your invoice. If, after any issues have been resolved, the invoice remains outstanding, it is time get a little more forceful. If you have provided your customer with specific Terms and Conditions (Terms) you should reiterate to your customer their rights and obligations under those Terms. For example: If your Terms provide for you to charge the customer interest on the outstanding invoice, start doing so (you can always agree to write off any interest accrued at a later date if payment is received). Put your customer on notice that interest is accruing on the outstanding invoice, specify the rate and make it clear that interest will continue to accrue until payment is received in full. Your Terms may also give you a contractual right to recover from the customer any debt collection agency fees and/or solicitor-client costs (commonly referred to as indemnity costs) incurred in recovering, or attempting to recover, an outstanding invoice. If so, make this clear to the customer and advise that if payment is not forthcoming you will refer the matter to your solicitors, the costs of which will be sought to be recovered from the customer. Make it clear to your customer that if they attend to payment now, it will save them costs in the long term. If you have made contact with the customer and payment remains outstanding, it is time to contact us. Past experience shows that a letter from a solicitor is an effective tool in getting your debtors to either pay the invoice or engage with you, or us, to arrange payment terms. When a debt recovery matter is referred to us the first step we take is to write a “letter of demand” to your customer. In this letter we advise the customer that we act for you, we briefly set out the background to the matter, the goods/services provided, the invoice(s) issued and any discussions or correspondence you may have had with the customer around payment of the invoice. We then state the contractual arrangements and/or statutory obligations between you and the customer, including any default interest and indemnity costs provisions. It is important that the letter of demand is accurate and thorough as it can be relied on by you to evidence your adherence to due process, and reasonableness, in the event Court proceedings are issued. The letter of demand will request payment in full or request that the customer contact us to discuss a payment arrangement if payment cannot be made in one lump sum. (The terms of any payment arrangement will first be discussed with you and, once agreed, recorded in writing.) A date for payment, or a payment proposal, is specified, usually within 10 workings days of the date of the letter. We put your customer on notice that if payment is not received or an acceptable payment arrangement entered into by the specified date, Court proceedings could be issued against them without further notice. We take care to ensure your rights and position are reserved in full. Dependent on the reason for your customer failing to pay your invoice, a letter of demand from us will often, but not always, compel the customer to stop ignoring your invoice (or paying others in preference) and make payment. On receipt of a letter of demand, a customer experiencing genuine, short-term, financial issues will likely contact us, or you, to discuss a payment arrangement. Time to consider Court proceedings? If our letter of demand does not result in payment or a response from your customer, and depending on the sum outstanding, the next step we recommend is to issue Court proceedings. Before issuing Court proceedings, we always consider the feasibility of doing so, balanced with the likelihood of recovery from your customer. If your customer has disputed the invoice and/or the services provided, and the debt is $30,000 or less, you can refer the matter to the Disputes Tribunal for determination. Generally, (except for specific exceptions) parties are not entitled to be legally represented at a Disputes Tribunal hearing, unless it appears to the Disputes Tribunal to be proper in all the circumstances to allow legal representation, and such representation is approved by the Disputes Tribunal. Even though we may not be able to represent you in the Disputes Tribunal, we can assist you in preparing your claim. However, any legal costs incurred by you in relation to a Disputes Tribunal claim are not recoverable by way of a costs award. The Disputes Tribunal does not have jurisdiction to award costs, other than in exceptional circumstances. If the debt is under $350,000 then the District Court is likely the appropriate jurisdiction in which to issue proceedings. If the quantum is higher, or there are more complex contractual or property matters involved, the proceedings should be issued in the High Court. Being served with Court proceedings may be what is required to get your customer to engage in payment discussions or settlement negotiations. If the customer ignores the Court proceedings, and judgment is entered in your favour by default, then you will have a Court order on which to rely to take further enforcement steps, if you so choose. We can help with enforcement action if the matter comes to this. What now? Being owed money, no matter what the sum, is stressful in itself without having to incur legal fees to recover what is due to you. That is why we always approach debt recovery matters with pragmatism and efficiency. We do not want you to have to “throw good money after bad” so we do our best to streamline the process with the first step always being a letter of demand. If you have outstanding invoices that need addressing, or you would like to discuss your debt recovery and enforcement options, contact us. If you do not currently have Terms and Conditions, we can help you with those too.