Property and Commercial Tips and Traps – March 2014

March, 2014

Curing breach of a lease- what is “reasonable time?”

Landlords – be aware: If you want to re-enter the premises and terminate a lease for breach of a tenant’s covenant other than for payment of rent, you must serve a notice to remedy on the tenant providing the tenant, where the breach is capable of remedy, a reasonable time to cure it.

But what is a reasonable amount of time?

In the recent case of Primary RE Limited v Great Southern Property Holdings Limited (Receivers & Managers Appointed) (In Liquidation), the Victorian Supreme Court held that what is a reasonable time depends on the circumstances.  The Court went on to say that the breach notice should be clear about what action the landlord requires the tenant to take and by what date in order to prevent the landlord from terminating the lease.

Lessons for landlords when serving breach notices

What is a reasonable amount of time to respond to a breach notice will depend on the individual circumstance.

If there is a lot of time intensive work to be completed in order for the tenant to remedy the breach, the court has held it reasonable for the tenant to be given 1 month of being served with a breach notice to do the things that is required to be complied with.

When contemplating whether to issue a breach notice, you should be clear about:

1.     why you are giving the notice;
2.     the nature of the breach alleged;
3.     what your tenant has to do to avoid forfeiture; and
4.     what would be an appropriate response and when is it reasonable to expect it.

ASIC’s enforceable undertakings – the big stick just got bigger.

ASIC has put financial planners and dealer groups well and truly on notice, placing compliance and risk management front and centre of their priority considerations.

In its latest enforcement action, ASIC secured an unprecedented enforceable undertaking from one of Australia’s biggest independent financial planning groups, Wealthsure.

The enforceable undertaking essentially involved:

1.     the removal of Wealthsure’s Managing Director, Mr Darren Pawski;
2.     the restructure of the entire board; and
3.     the restriction of Mr Pawski’s rights as shareholder and limitation on the exercise of his shares to ensure that he had no involvement either directly or indirectly in the key operations of the business.

ASIC found that Wealthsure, which had more than 300 financial planners under its banner, had inadequate compliance systems and a business culture that gave insufficient priority to risk management.  As a consequence, it has created “detrimental outcomes” for consumers.

What does this mean for you?

Every financial licensee must consider whether its compliance and risk management systems are robust enough to withstand the level of enquiry and interrogation required by ASIC.

If there was ever any doubt that compliance and risk management are ASIC’s number one priority, this enforceable undertaking has well and truly put that to rest.

Together with Freedom of Financial Advice reforms, ASIC is sending the strongest message possible that there is no place for a light-touch approach to compliance.

There is simply no substitute for a robust, consistent and coherent compliance and risk management systems and financial planner oversight. ASIC has made it clear it will not hesitate to wield its very big stick against dealers who fail to comply.

When a personal guarantee catches out the Starr-ey eyed.

The Supreme Court of South Australia has issued a timely reminder that providing a guarantee is a serious undertaking and certainly not an obligation to be entered into starry-eyed!

In the recent case of Starrs v CBS the Full Court rejected an appeal by Dr and Mrs Starrs on guarantees they gave in the sum of almost $2.4 million.

The guarantees secured a $3 million overdraft which CBA provided to Seniors Care Services Pty Ltd (Seniors). Mrs Starr was sole director of Seniors and Dr Starrs was the sole shareholder.

The purpose of the overdraft facility was to enable Seniors to acquire and operate a distressed business run by Truscott’s Pty Ltd (then in receivership). The guarantees were secured by mortgages over the Starrs’ 3 properties. The CBA did not register the mortgage on one of the properties until nearly two years after the overdraft facility was made.

Seniors ultimately defaulted on its overdraft and CBA called on the Starrs’ guarantees. On appeal, the Starrs argued that the guarantees were ineffective because the bank failed to register the mortgage at the time the overdraft facility was first made available to Seniors.

The Court held that the failure by CBA to register the mortgage did not excuse the Starrs from their obligations under the guarantees. They were therefore liable to pay the full amount of the overdraft plus interest in accordance with the terms of the loan and the guarantees.

Lessons

Lesson 1: Don’t be starry eyed when signing up as guarantor – the obligations are real and will ultimately come to rest with you. Unless there is some deficiency in the guarantee or loan agreement, the court will enforce your contractual obligations.

Lesson 2: Get legal advice so that you are clear on your obligations under the loan agreement and the guarantee – make sure that you know the full extent of your liability.

Lesson 3: If in doubt, don’t guarantee the borrower’s obligations – because while it’s all starry eyed optimism in the beginning, that optimism quickly fades when the guarantee is called upon and you are left with the liability.

When common place means common sense: bank guarantees as security

Commercial and retail landlords often request tenants to provide security for the performance of their obligations under a lease. While the security may take the form of either a security deposit (cash bond) or bank guarantee, the latter has been preferred in recent times.

Why the industry preference for bank guarantees?

A bank guarantee is an undertaking by a bank to assume responsibility for payments by the landlord, in effect securing payment under the lease by a third party. In cases where the tenant becomes insolvent, the bank is obliged to make good on the payment.

By contrast, a security deposit is money held on trust by the landlord to secure the tenant’s performance under the lease. While a security deposit usually guarantees payment in case of default, if the tenant becomes insolvent, a liquidator may be able to recover the security deposit as a ‘preference payment.’

There are also other procedural advantages to bank guarantees. Under retail shop leases legislation in Queensland, the landlord and the tenant’s authority is required to withdraw funds from the security deposit if, as is usually the case, it is held in an agent’s or solicitor’s trustee account. In contrast, the landlord alone, without reference to the tenant, is able to call on the funds of the bank guarantee in the case of default.

Administrative requirements of banking institutions often mean there is significant delay in relation to a bank guarantee being issued. Where possession of the tenancy is a matter of urgency, tenants can offer to provide an interim security deposit while waiting for a bank guarantee to allow entry into possession.

Landlord’s should be aware that the risk of initially accepting a security deposit instead of a bank guarantee is that the tenant often loses motivation to actually provide the guarantee at a later stage. Instead the landlord has reduced bargaining power as the tenant is already in possession and focused on trading.

If you are a landlord, it is always necessary to consider which form of security you require under the lease. If it is by bank guarantee, it is wise to make receipt of the guarantee a pre-condition to allowing entry into possession to avoid later complications.

For tenants required to provide a bank guarantee it is imperative to apply for the bank guarantee early in the process to ensure that this requirement is fulfilled in time.

Bob the unlicensed builder: owner/builder works and notice requirements

Under section 47 of the Queensland Building Construction Commission Act 1991 (QBCC), where work is carried out on land by an unlicensed person (including an unlicensed owner/builder) and that land is offered for sale within six years after completion, the vendor must provide notice to the purchaser before the contract of sale is signed.

The notice must include details of the building work and a warning in the form required by regulation 22 of the Regulations. The notice cannot be contained within the contract of sale itself. The regulation requires the notice to be given to the purchaser in duplicate, with the purchaser returning a signed copy to the vendor before the contract is signed.

It is important that a vendor (including a mortgage exercising a power of sale), strictly complies with these requirements because, if a notice is not given in accordance with the above provisions, the vendor will be taken to have given the purchaser a contractual warranty (which cannot be excluded under the contract) that the building work was properly carried out.

How to avoid liability

In circumstances where it is difficult, or impossible for a vendor to ascertain the date when any owner/builder work on the land was actually completed, the best course of action is to give the required notice.

If the title bears an owner/builder endorsement but no building work has been started by the time of sale, there is no need to give the notice to a proposed purchaser.

Contact Mills Oakley

tony-butler-mills-oakley

Tony Butler  |  Partner
Property and Commercial
Ph: (07) 3228 0432
Email: tbutler@millsoakley.com.au

 

greg-richards

Greg Richards  |  Partner
Building, Construction and Infrastructure

Ph: (07) 3228 0443
Email: grichards@millsoakley.com.au

 

Rechelle Brost |  Partner
Building, Construction and Infrastructure

Ph: (07) 3228 0421
Email: rbrost@millsoakley.com.au

Privacy Policy | Terms of Use