With the COVID-19 pandemic and its effects (at a global, national and local level) rapidly changing on a daily basis, we have been inundated by landlords, tenant and agents asking how COVID-19 will affect them, specifically their businesses and leasing arrangements.
The Commonwealth Government has acknowledged that relief will be provided for tenants of both commercial and residential tenancies. This will likely take the form of state-specific legislation. We will provide further information when more details about the legislation has been released.
In the meantime, here are some useful answers to our most frequently asked questions that we are encountering on a daily basis:
Can a lease be terminated if there is a force majeure clause?
Madgwicks Special Counsel Catherine Ballantyne has recently explained that force majeure is a legal principle where unforeseen circumstances prevents a party from fulfilling obligations under a contract.
Protection under the force majeure principle is only granted if the contract or lease includes a force majeure clause.
Force majeure clauses are not common in leases however parties should review their leases for such a clause or seek legal advice to review their lease for such a clause.
If the lease does include a force majeure clause, the applicability of the clause will turn on whether the COVID-19 pandemic falls within the scope of a force majeure event.
Subject to how the pandemic evolves, if the government classifies the pandemic as a national emergency, at that time the clause may become applicable.
Each force majeure clause has its own requirements regarding notice and the effect of triggering the clause. Given that the circumstances are developing day by day, parties should seek advice in relation to the enforceability of a force majeure clause and the effects of the clause’s activation to ensure that the benefits of the clause can be maximised by the party.
My lease doesn’t have a force majeure clause, what other legal options are available?
Frustration is a common law concept that occurs when the obligations under a contract or lease cannot be completed due to unforeseen circumstances or an uncontrollable event. If the lease is frustrated, it is terminated and each party is released from its obligations under the lease.
There is an extensive body of law that relates to the doctrine of frustration. The following examples are not considered as frustration of a contract or lease:
- there is a force majeure clause in the contract that applies to the uncontrollable event;
- the party is merely suffering an unforeseen loss or the burden for it to perform its obligations has increased; or
- a delay in being able to perform an obligation under the contract (that is not an unreasonable delay).
A case heard in Hong Kong in relation to the SARS outbreak in 2003, considered a resident moving out of their home for 10 days in order to comply with an isolation order from the government1. The Court held that the interruption did not frustrate the lease because it was not expected to last for the term of the lease or for a long period of that unexpired term2.
Whilst there is no case on this point in Australia, parties may wish to consider whether a lease can be frustrated if the government imposes restrictions that span a substantial part of the term of the lease.
More recently, the High Court of England and Wales found that Brexit was not sufficient to frustrate a lease3. The tenant argued that it lost privileges and immunities granted under the EU Treaty. The High Court found that the tenant did not lack the ability to comply with its obligations under the lease. The tenant could also continue to lease the premises (albeit under less-desirable circumstances).
In the case of COVID-19, the orders imposed by the government may prohibit the conduct of the permitted use which may be cause the lease to be frustrated.
The specific circumstances of each case should be considered and parties should seek advice in relation to whether the lease is frustrated and whether or not termination of the lease is desirable.
What other options are available to landlords and tenants?
The payment of rent is a material term of a lease and failure to pay grants landlords the automatic right to terminate the lease and re-enter the premises if the non-payment of rent extends for 14 days after notice is provided.
It may be desirable for both parties not to terminate the lease and instead to enter into discussions as to a rent abatement or reduction for a period of time.
This benefits both parties as tenants have a reprieve from rent and outgoings payments that are no longer reasonable under the current restrictions that affect the tenant’s trade or business. This also benefits landlords who will avoid vacant premises and entering into negotiations in an unfavourable market following the COVID-19 crisis.
Landlords should also be cautious to agree to rental reductions without documenting the agreement. Tenants may have an argument that the landlord be estopped from enforcing the rent determined under the lease at a later time.
Communication between the parties and legal advice in facilitating those negotiations will assist both parties at this time to also ensure that records of critical communications between the parties are recorded in order to avoid a later dispute.
What should I be doing now?
Action 1
Landlords and tenant should be across the latest requirements by the government and any other applicable authority to ensure that they are complying with their respective obligations, whether it be in relation to occupant capacity or sanitising measures.
Not only is it important to comply with the government’s requirements, most leases require tenants to comply with any applicable laws, requirements, regulations or orders made by an applicable authority. Failure to comply with the government (whether federal or state) can form the basis of a breach of the lease.
The Victorian and New South Wales Small Business Commissions are both posting helpful resources for small businesses.
Action 2
Both landlords and tenants should also review their insurance policies to determine whether their losses are covered in cases of pandemics.
If you are unsure of your rights and obligations or wish to seek advice about how best to proceed, please seek legal advice to discuss your specific circumstances.
We will also be providing an update following the government releasing comments or legislation regarding tenancy relief and protection.
1 Li Ching Wing v Xuan Yi Xiong [2004] 1 HKC 353.
2 Ibid (357).
3 Canary Wharf (BP4) T1 Limited & Others v. European Medicines Agency [2019] EWHC 921
