More often than not, when a commercial landlord terminates their lease with a tenant, issues can arise concerning the tenant’s obligations to “make good” and remove their goods from the leased premises. This basically relates to personal property owned by the tenant that does not form part of the premises (i.e. items of the tenant that are not permanently affixed to the premises).
The main practical implication of this is that the landlord is unable to quickly re-let the premises and mitigate its total loss to be incurred because of the tenant’s breach. Accordingly, having mechanisms in the lease to deal with this situation can greatly increase the speed in which a landlord can reinstate the property and find a new tenant.
Who owns the property upon termination of the lease?
The answer to this question largely depends on the lease agreement itself. A properly drafted lease will include provisions providing (amongst other things) that the tenant agrees that its property will be taken to be abandoned if the tenant fails to remove it within a stated reasonable time. In that circumstance, the ownership of the property will transfer to the landlord and the landlord can deal with it accordingly, such as selling it or otherwise disposing of it. That being said, great care should be taken to ensure that the parties’ intentions are clearly expressed to ensure that the ownership properly transfers to the landlord.
If the intention is not clearly expressed in the relevant clause within the lease and the landlord deals with the property by selling it or disposing it, the landlord may be liable for damages to the tenant. This is because the landlord would be taken to have committed a trespass with respect to the property, or to have dealt with the property in a manner that is offensive to the interests of the tenant.
What if there is no clause within the lease?
When there is no provision within the lease concerning the abandonment of the tenant’s goods, upon termination of the lease, a bailment will be created between the landlord and the tenant. A bailment is essentially a situation where the possession of personal property is transferred from one party to another, but not ownership. In this circumstance, the party in possession of the property has certain duties to the owner of the property, including a duty to keep the property safe.
Accordingly, the landlord will be required to keep the goods safe until they are retrieved by the tenant, or until it can be shown that the tenant has abandoned the property. Practically, and in order to re-let the premises as quickly as possible to minimise the landlord’s loss, the landlord can keep the property in safe storage and seek damages against the tenant for the same. In reality, the costs of doing so can be quite extensive, depending on the nature and extent of the property.
In any event, steps should be taken by the landlord to seek that the tenant recover its property, or to otherwise confirm the tenant’s intention to relinquish the property. This can be evidenced by the tenant’s conduct or correspondence, but as above, great care should be taken to ensure that the tenant can be shown to have abandoned the property.
What if a secured creditor is seeking to recover the property?
Whether a secured party has rights in the tenant’s property will largely depend on the nature of the security interest, whether it has “attached” to the property, and whether the interest has been “perfected”. The Personal Property Securities Act (PPSA) governs the law in relation to the enforcement of security interests. Whilst the legislation is inherently complex, the easiest way to perfect a security interest is to register the interest on the Personal Property Securities Register (the Register) within the specified timeframes. Attachment will generally occur if the tenant has executed a security agreement creating a security interest in relation to the property. If the secured party has the highest priority security interest (generally if their interest was registered first), its security interest in relation to the tenant’s property will generally be enforceable against the landlord so long as:
1. the security agreement between the secured party and the tenant is in writing;
2. signed or otherwise adopted by the tenant; and
3. describes the property subject to the security agreement.
In these situations, it is best to seek to correspond with any secured parties to seek their intentions regarding whether they seek to enforce their rights to seize the property.
What can I do to safeguard my interests as a landlord?
As above, a carefully drafted abandonment clause can mitigate many of the issues faced when a tenant vacates a leased premises and leaves their property behind. Often, a properly drafted abandonment clause will further provide an opportunity for the landlord to register a security interest over the tenant’s property on the Register. If the security is registered prior to any other parties, this will assist in circumventing the above issues that can ensue.
If you would like advice specific to your situation, contact our litigation team on 07 3370 5100.
Associate | Litigation
PHONE +61 7 3370 5100