Lessons for retail landlords with a tenant in financial distress

Landlords navigating retail lease disputes, particularly when tenants face financial difficulties, face several difficulties in recovering their losses. At a stressful time, they must remember to act promptly, maintain thorough documentation, and ensure compliance with lease terms to protect their interests in lease disputes. Landlords who follow these best practices are better positioned to recover losses and minimise risks in retail lease disputes.

The value of these steps was recently demonstrated in Heriot Pty Ltd v Williams [2024] NSWCATCD 35, which confirms that personal guarantors can be held liable for a tenant’s obligations, including unpaid rent and damages, and underscores the importance of landlords taking reasonable steps to mitigate losses following a tenant’s breach. In addition, it clarified the treatment of GST in claims for liquidated damages and the accrual of interest on such claims.

The retail tenancy and the tenant in liquidation

Heriot Pty Ltd leased two retail premises in Bondi to Bertha Two Pty Ltd, which operated a Hungry Jack’s restaurant in them. Bertha Two's obligations under the lease were personally guaranteed by Mr Williams, and a bank guarantee of $72,049.99 was held as security.

Some years into the lease, Bertha Two began falling into rental arrears, and despite some payments being made, the outstanding rent continued to accrue. Liquidators were appointed to Bertha Two, prompting Heriot to issue a letter of demand to Mr Williams under the personal guarantee. Later that month, Heriot terminated the lease, re-entered the premises, and subsequently entered into a new lease with Betty’s Burgers, which included a 12-month rent-free incentive.

Heriot then sought $627,232.30 from Mr Williams, made up of unpaid rent, lost rent, make-good costs, re-leasing costs and interest, less the proceeds of the bank guarantee. The dispute was heard by the Civil and Administrative Tribunal (Consumer and Commercial Division).

The first question was whether Mr Williams was the guarantor under the lease. It found the lease identified him as the guarantor and required him to unconditionally guarantee payments demanded by Heriot, and indemnify Heriot for damages and expenses arising from Bertha Two’s breaches. The Tribunal confirmed that the guarantee was a continuing obligation, remaining in force while any moneys were payable by Bertha Two.

On the monetary claims, the Tribunal determined that Bertha Two had breached the lease by failing to pay rent for six months, and effectively repudiated the lease. The Tribunal awarded Heriot damages for unpaid rent, lost rent (exclusive of GST), make-good costs for restoring the premises, and re-leasing costs. It held that Heriot had fulfilled its duty to mitigate losses by promptly re-leasing the premises, even though a rent-free incentive was offered to secure the new tenant. The Tribunal also clarified that liquidated damages, such as lost rent and make-good costs, are not taxable supplies and must be calculated exclusive of GST.

Interest was awarded on unpaid rent accrued before the commencement of proceedings, but for claims like lost rent and make-good costs, interest was limited to the period after proceedings began, as no prior demand for these amounts had been made. The Tribunal required Heriot to recalculate the interest to exclude GST on non-taxable claims and submit revised figures. Additionally, a costs order was issued against Mr Williams, with final orders pending the submission of the corrected interest calculations.