Property issues in Australia: Tenants and COVID-19

Articles Written by Peter Trevaskis (Partner), Rita Bradshaw (Associate), Anna Shilova (Associate)

This briefing note focusses on issues arising for commercial (including retail) tenants conducting businesses from leased premises

This week the Prime Minister announced that State and Territory governments would be working on model rules designed to support tenants experiencing hardship due to COVID-19. The New South Wales (NSW) and Western Australia (WA) State governments have been tasked with creating the new model rules focussing on bringing relief to tenants experiencing hardship. It is unclear as to what the new model rules will contain but there may be rules around rent abatement, or government support for lease payments.

Until the model rules are released a tenant should consider the provisions of its lease which might assist when dealing with the issues tenants face in their businesses and the impacts on revenue caused by Government, public authority and societal responses to the COVID-19 global pandemic. It is noted that the economic, social and geo-political climate is extremely volatile and fluid, and Government (across all 3 tiers) and public authority responses are evolving daily. In that context, and without in any way being exhaustive, issues business tenants are being forced to deal with are:

  • compulsory closures, enforced by law
  • limited or no access to premises
  • staff and customer health and safety
  • cancelled orders
  • evaporation of revenue
  • premises and in-store security
  • perished stock
  • exposure to landlords calling on security (bank guarantees, security deposits, enforcing personal guarantees)
  • potential termination of leases for default.

Tenants should review the terms of their lease to determine whether any lease provisions offer avenues of relief for payment of rent and outgoings, and relief from compliance with other lease obligations such as trading covenants, and maintenance of secure access to premises. Provisions, although not common, which might offer some avenue of relief include:

  • force majeure clauses
  • change in law provisions
  • abatement where a building or centre falls below a specified level of occupancy and/or trading
  • rental abatement for denial of access, and/or
  • breach of quiet enjoyment.

Some leases might also include early termination rights (in favour of the tenant), percentage rent clauses (offering an opportunity for rent claw back if trade has now ceased), maintenance of estate clauses, or other specific provisions which protect a tenant if a significant change in the nature of the business premises occurs without fault of the tenant.

Forced Closures

The Prime Minister has been announcing forced closures on a regular basis. The statutory powers of the Federal Government, as well as the State and Territory Governments, will be broadened in to COVID-19 environment. Whether or not this will result in a forced closure of your premises will depend on the use, location and nature of your business (whether or not it is considered an essential service which, in itself, is a moving concept). If your business falls into the category being forced to close under statutory orders, then you are required to comply with such orders.

Commercial leases will likely contain a clause that requires you to comply with all laws and requirements of authorities from time to time that relate to, or affect, the premises. Therefore your obligation to comply will not result in a breach of the lease. However, of itself that will not relieve a tenant from the obligation to pay rent and outgoings, maintain insurance, provide security for performance (such as a bank guarantee), and so on.

In retail leases, it is common to require a tenant to keep premises open and continue to trade. Similar to commercial leases, the majority of retail leases will contain a clause requiring tenants to comply with all applicable laws, regulations and government directions. In addition, retail tenants are usually subject to strict health and safety obligations requiring retailers to provide a safe working environment for employees and customers. While the government direction will take precedence over the lease covenant, the rent will remain payable.

The COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) (No 1) was introduced into Parliament on 24 March 2020 to protect the health, safety and welfare of tenants. It received assent and commenced on 25 March 2020. Among other things, it amends the Residential Tenancies Act 2010 (NSW) and the Retail Leases Act 1994 (NSW) to permit the Governor to make regulations under either Act that:

  • prohibits a landlord from recovering possession of the premises
  • prohibits a landlord from terminating a lease
  • regulates or prevents the exercise or enforcement by a landlord of a right that they have under the lease or the Act, and
  • exempts a tenant from the operation of a provision of the lease or the Act.

Any regulations made pursuant to these new powers will only last for six months.

These regulations will assist tenants with remaining in possession and occupation of the premises and restrict the landlord from evicting tenants during this crisis for a six month period from the date of the regulation.

If the building you occupy is closed due to a statutory order, it is unlikely that a landlord will be in breach of the covenant for quiet enjoyment. However if the landlord decides to close voluntarily, the tenant might have a claim in connection with the covenant for quiet enjoyment (implied in all leases, and expressed in many). There may be emergency provisions that may impact on the landlord’s decision, and also provide the landlord with rights to act to close or safeguard premises without notice to the tenant. Accordingly, we recommend that tenants stay vigilant and clarify the reason for any closures with the landlord.

If you are not required to close your premises due to a statutory order but decide to voluntarily close due to COVID-19 concerns or other considerations, such as financial struggles, you will be in breach of your lease unless your lease contains an express right to break or terminate the lease.    

Limited, or no, access to premises and rent abatement

You may not be able to access your commercial premises due to a COVID-19 outbreak, a lockdown or a closure. It may be unclear as to when you will be able to regain access. In these circumstances you may be able to rely on a rent abatement clause, if there is one, depending on how the lease is drafted.

Usually rent abatement clauses relate to damage and destruction to the premises, however some refer to the premises being inaccessible which may trigger an abatement event. It is important to review these clauses carefully to ascertain whether an abatement might apply.

Rent clauses usually state that rent is payable without deduction and so it is not recommended that you stop paying rent without having a discussion with the landlord first. If the landlord is commercially minded, a commercial arrangement may be able to be negotiated. It may be difficult for a landlord to secure a replacement tenant in the current climate.

There has also been suggestion that the federal government will provide landlords with tax relief, either by cutting back income tax or lifting land tax obligations, in return for waiving or reducing rent. These remain suggestions and we wait to see whether these are applied and how they will be managed.   

Force majeure

There is no common law doctrine of force majeure. Force majeure is a legal expression which means, in a general sense, unforeseeable circumstances that prevent someone from fulfilling a contract. It is commonly used in construction and major project contracts, but is uncommon in commercial leases.

Nevertheless, leases should be reviewed to determine whether it includes force majeure provisions which offer relief to a tenant. If there is such a clause it needs to be interpreted carefully to determine whether it covers pandemics or situations of this nature. 

Frustration

Frustration brings a contract to an end due to the occurrence of an intervening, post-contractual event which makes performance of the contract impossible. This is with no fault of either party and it could be argued that a statutory closure due to a pandemic would fall into this category. However case law indicates that a temporary change would not ordinarily be enough to frustrate a lease. The lease would continue during any period of forced closure and it is anticipated that the COVID-19 pandemic will eventually pass.

Insurance

The tenant may have tenant’s business interruption cover which may be used to meet the required payments under the lease. The terms of the tenant’s insurance policies, and in particular exclusions, should be carefully reviewed and considered. The ability of insurers to pay on a claim is a secondary issue that may arise given the likely volume of claims.

Relief against Forfeiture

In these exceptional circumstances we expect the courts to grant relief against forfeiture to tenants who default as a direct consequence of COVID-19. Relief against forfeiture is where, upon application, the courts make an order that allows a tenant, who is threatened with eviction or has been evicted, to return and occupy the premises. The orders for occupation may contain certain conditions depending on the basis of the eviction or threat of eviction.

If you require further information or a better understanding of how relief against forfeiture works and whether this can assist you with your current situation, please contact our property team.

Advice

It is anticipated that, given the volatile market, tenants and landlords will need to take a long-term view on their partnership and possibly negotiate a commercially suitable arrangement to address the situation, if both parties wish to remain in business. For example, a landlord may agree to suspend or reduce the payment of rent, in return for:

  • the tenant agreeing to an extension of the lease term, or
  • the tenant agreeing to make up the rent shortfall by paying the suspended or reduced amount over the remaining term of the lease (amortised) when business conditions stabilise.

Parties’ commercial negotiations should always be conducted on a without prejudice basis and address rent concessions, reduction in building operating costs, or converting of retail rent to turnover rent, among other things, depending on the type of the lease and bargaining positions of the parties. Once agreement is reached, the agreement can be formalised so as to be binding on both parties.

Despite any negotiations taking place, any commercial arrangements with the landlord must be documented in writing by way of side letter or deed of variation.

If you are not clear as to your exposure or rights in respect of a lease, or need help with navigating commercial arrangements, we recommend that you get advice before you act to limit any potential damage to you, your guarantors (if personal guarantees have been provided) and your business.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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