Time is of essence

A significant number of businesses in Australia are financially struggling to survive in this economic environment due to rising number of debtors. In general, business owners tend to procrastinate the issue of recovering debts from their debtors. This month’s newsletter focuses on the legal implications of businesses’ decisions to procrastinate recovering debt(s) from its debtor. It aims at alerting business to exercise their right in a timely manner to be successful in any action against its debtors.

My client, who operates a business of supplying office stationery to other businesses, met me last week to discuss an outstanding debt that another business owed his business. My client supplied this business with significant stationery every month for the past seven to eight years and had some unpaid invoices during this period of time. My client queried whether his business was within time to initiate legal proceedings to recover these debts from the other business.

What does the Law say?

In Western Australia, the Limitations Act 2005 prescribes a general limitation period of six years to recover debts arising from a contract. A ‘limitation period’ is the maximum time that a person or entity has to enforce its legal rights from the time the cause of action arises. A ‘cause of action’ will arise when all facts required to establish a particular claim come into existence.

In general, the terms of a contract between parties dictate when the debt becomes due and payable by one party to another. A debtor’s failure to pay monies by the due date constitutes a repudiation (refusal by the debtor) to fulfil his obligations in the contract. The person entitled to receive the monies (the creditor) may terminate the contract giving rise to a ‘cause of action’ to recover the debt. The creditor has a ‘limitation period’ – maximum time of six years from the date of non-payment to initiate appropriate proceedings against the debtor.

If any claim lodged after substantial delay were to be permitted to proceed, it could potentially raise problematic effects on the administration of the court proceedings, namely the accuracy of the evidence presented and statements of witnesses.

When parties have an ongoing relationship over a long period of time, the contract may incorporate multiple promises by a debtor to pay monies to the creditor resulting in accumulating debts. These accumulating debts run from day to day and anticipate that further debts will be incurred.

In the event a debtor of an accumulating debt, the creditor has the discretion to either:

a) accept non-payment by the debtor and terminate the contract; or

b) not accept the non-payment by the debtor and affirm the contract between the parties.

If a creditor makes a decision to affirm the contract it may subsequently terminate it should the debtor continue to repudiate it or after the creditor has followed any termination processes set out the contract. In case of accumulating debts, the limitation period of six years begins to run from the date the creditor terminates the contract and not from the date the debtor fails to pay the debt.

The limitation period can be extended in a number of circumstances. A common example being a confirmation from the debtor before the expiration of the limitation period. The Limitation Act prescribes that debtor’s confirmation must either be by way of:

a) a written acknowledgement that the creditor has a right to the debt; or

b) a payment to the creditor towards the debt(s) owed.

A limitation period to recover debts seeks to balance the interests of all parties and the effective administration of justice. A delay in looking to commence court proceedings will result in any creditor missing the limitation period and losing its ability to enforce its legal rights.

Our discovery and outcome

A discovery of my client’s accounts revealed that the unpaid invoices had spread over a few years with some more than six years old and some within the six years period.

My client had never terminated the contract with its debtor by following the termination processes set out the contract. I advised and assisted my client in formally terminating the contract and initiated proceedings on its behalf to recover the debt.

Takeaway message

Calculating a limitation period to commence legal proceedings can be simple or complex depending on the cause of action and the circumstances of each matter. We strongly recommend that businesses should not delay in looking to commence court proceedings because if it does, the business may miss a limitation period and lose its ability to enforce its legal rights. Time is of essence!

We have extensive experience in providing these services to a wide range of clients and would be glad to assist you with your debt recovery efforts.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.

Archana Luktuke25 October 2019

Mr and Mrs Joe Bloggs contacted me to seek legal advice on a proposed commercial lease provided by the real estate agent for their upcoming coffee shop in suburban Perth.

Mr and Mrs Bloggs were being rushed into signing the proposed lease, which they were not comfortable with. They started by explaining how their friend, who runs a hair dressing salon, was provided with extensive written information and a proposed lease to review before executing it. This was in stark contrast to a small seven-page template that they received by way of a proposed lease from their letting agency. I explained to Mr and Mrs Bloggs that their friend and they are subject to separate leasing legislation, however their due diligence before signing the proposed lease will assist them in the long run. In Western Australia, leases for commercial premises can be categorised as retail leases and commercial leases. It is important to note that all commercial leases in Western Australia are not governed by the same legislation.

A summary of the safeguards that a potential lessee of a commercial lease must consider is discussed below.

Retail Leases

Retail leases are governed by Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (the “Retail Shops Act”) and are limited to premises:

(a) with a lettable area of 1,000 m2 or less;

(b) used for carrying on a business and that are in a retail shopping centre (a group of premises, 5 or more) or otherwise; and

As at 1 January 2013, 'specified businesses' are limited to:

(a) dry cleaning;

(b) hairdressing;

(d) shoe repair (which includes key cutting and engraving); and

(e) sale or rental of videos tapes, DVDs, electronic games and other similar amusements.

Any landlord, whose commercial premises is governed by the Retail Shops Act, is bound by significant number of obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease. In comparison landlords, whose premises is governed by the Transfer of Land Act 1893 (WA) and the Property Law Act 1969 (WA), are not bound by any specific obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease.

The Retail Shops Act did not apply to Mr and Mrs Bloggs proposed lease. Therefore, began Mr and Mrs Bloggs’ due diligence journey before executing their commercial lease.

Commercial Leases

The real estate agent provided Mr and Mrs Bloggs with two documents – the Commercial Lease with Annexures and General Terms and Conditions of the Lease. Mr and Mrs Bloggs were seeking advice as to whether both these documents captured the terms and conditions of the agreement between the landlord and them.

Typically, most real estate agents would fill in the details in a Commercial Lease template published by Real Estate Institute of Western Australia (REIWA) and provide it along with the General Terms and Conditions of Lease, also published by REIWA, to any potential lessee.

The General Terms and Conditions of Lease document sets out the obligations and liabilities of the landlord and the potential lessee, however any potential lessee must review whether the following key details have been included in Commercial Lease document provided to him/her:

(a) whether the potential lessee and the landlord have been accurately identified (is the potential lessee and/or the landlord an individual or a company);

(b) whether any guarantors have been included in the lease;

(d) whether any other items (such as equipment) owned by the landlord are being included with the lease;

(e) the term of the lease;

(f) whether the potential lessee has an option or multiple options to renew the lease;

(g) the amount of rent and the frequency of payment of rent;

(h) the mechanism and frequency of rent review;

(i) what are the types of outgoings that the potential lessee is to pay and an estimated amount per month;

(j) whether a security deposit or bank guarantee will be held and for what amount;

(k) permitted use of the premises;

(l) whether the landlord has obtained approvals for the intended use and signage from the local council and the strata management (if applicable);

(m) whether the potential lessee has been provided with copies of approvals for intended use;

(n) insurance requirements to be complied with by the potential lessee; and

(o) how the agreement can be terminated and what is the notice period.

Mr and Mrs Bloggs proposed lease document had the following inadequacies:

(a) incorrect details of the proposed lessee – Mrs Bloggs was named as a lessee in place of the potential lessee company;

(b) the landlord had not obtained any approvals from the local council and the strata management for the intended use and signage although the terms stated otherwise;

If Mr and Mrs Bloggs would have signed up a lease with the inadequacies mentioned above, they would have put themselves in a financial predicament as the incorrect person would have been bound to comply with terms of the lease without any approvals to run the business at the premises and with no estimate of the costs towards outgoings.

Takeaway Message

Caveat emptor – buyers (in this case potential lessees) beware:

The clear message for any individual or entity considering a commercial (non-retail) lease is to undertake adequate due diligence and seek independent legal advice before executing any commercial (non-retail) lease.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.