Landlords and Tenants – Navigating Through the Coronavirus Pandemic

Commercial Real Estate and Projects

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DATE PUBLISHED: March 30, 2020

LANDLORDS AND TENANTS

NAVIGATING THROUGH THE CORONAVIRUS PANDEMIC

The effects of the COVID-19 outbreak in Australia has led many businesses to implement or consider a contingency plan for any required closures to premises or challenges facing tenants to pay rent under their lease in the short to medium term. 

Some lease issues to consider are set out below.


RENT ABATEMENT

Most leases provide a mechanism to abate the payment of rent and outgoings if the premises are destroyed or damaged so that the premises are not accessible or not fit for occupation for any period. 

In circumstances where premises are closed for a period caused by the COVID-19 outbreak (i.e. where there is no physical damage to the premises), whether by the landlord or a governing authority, it would be difficult in most leases for tenants to rely on these typical rent abatement clauses to receive any rent abatement.


QUIET ENJOYMENT

Most leases provide clauses to the effect that, provided the tenant performs all of its obligations under the lease, the tenant may occupy and enjoy the premises subject to the terms of the lease without interruption by the landlord.

However, commonly the landlord has the right under leases (without incurring liability to the tenant) to close the premises:

(a) in emergencies;

(b) to protect the safety of people; or

(c) if required by any law.

If the lease contains a clause on terms similar to the above, the tenant may not be able to obtain relief from the landlord under the quiet enjoyment provisions.


RETAIL SHOP LEASES ACT

If the landlord was to require closure of retail premises for any period, the tenant may have rights to recover compensation from the landlord under the Retail Shop Leases Act 1994 (Qld) (Act) in respect of business disturbance.

However, if the landlord closes the premises as a reasonable response to an emergency, or in compliance with any duty imposed under legislation or an entity acting under the authority of legislation, the landlord is not required to pay the tenant compensation.


FRUSTRATION

The common law doctrine of frustration could potentially be used by a tenant to terminate a lease if, without fault of either party, the lease is incapable of being performed due to an unforeseen event (or events), resulting in the obligations under the lease being radically different from those contemplated by the parties to the contract.

The legal consequence of a lease which is found to have been frustrated is that the lease is automatically terminated at the point of frustration.

Establishing frustration however, can be difficult as it does not apply to hardship. Hardship, even if severe, does not constitute frustration. 


PRACTICAL TIPS

For the most part, we expect to see commercially negotiated outcomes reached between landlords and tenants during the period of the COVD-19 outbreak with the mutual goal between the landlord and tenant being for the tenant to remain viable throughout the outbreak period so that the lease remains in place  ‘on the other side’ of the outbreak.

Some examples of ways in which landlords may agree to assist tenants through any period of hardship include:

(a) Draw down on security held by landlord
If the tenant is unable to pay rent for a period of time during the outbreak and the landlord holds a security bond or bank guarantee under  the lease, the parties may agree to allow the landlord to apply all or part of that security in lieu of the tenant’s obligation to pay rent for that period. This would be on the proviso that the tenant replaces the security amount once the outbreak is contained.

(b) Rent free period or forbearance
The landlord grants the tenant a period of time under the lease (e.g. 3 months) at a reduced rent or rent free.  The terms of this arrangement  might include:

(i) the period of the rent free or rent forbearance period (Rent Free Period);

(ii) in exchange for the landlord’s grant of the Rent Free Period, an obligation for the tenant to pay a security bond or provide a bank guarantee to the landlord at the end of the Rent Free Period to be held as security by the landlord for the performance of the tenant’s obligation for the remainder of the lease term (e.g.an amount equivalent to 3 months’ rent plus GST).

(iii) whether interest is payable by the tenant on the rent reduction when repaid; and

(iv) whether the rent reduction is  repayable by the tenant at some later date (e.g. progressive monthly repayments following the end of the Rent Free Period);

(v) the amount of rent reduction each month of the Rent Free Period;  

Any arrangements of the above nature should be documented by a formal deed of variation to the lease signed by the parties.


HOW WE CAN HELP

As a starting point, landlords and tenants should review the specific terms of their lease to assess the parties’ rights and obligations regarding closure of the premises, payment of rent, rent abatement or any other form of relief.

The parties should also consider any insurances taken out that could potentially assist parties affected by COVID-19 causes such as loss of rent insurance (for landlords) and business interruption insurance (for tenants).

To assist landlords and tenants in navigating through the outbreak period, McInnes Wilson can review the lease and provide a targeted advice setting out any rights and obligations of landlords and tenants under the lease and at general law for COVID-19 related causes.

In addition, with the Prime Minister’s recent comments that some form of payment moratorium will be imposed on commercial and retail leases to assist tenants affected by the Corona Virus outbreak, the Government’s recommendation is that landlords, tenants and their banks ‘sit down’ and talk to each other about suitable arrangements in the first instance.

Any arrangement dealing with either rent forbearance or rent free periods granted by landlords to tenants should be documented by written variation to the lease terms.

We are well placed to assist landlords and tenants in negotiating the terms of any rent forbearance or rent free period granted during the period of the COVID-19 outbreak and to prepare the required documentation to ensure the parties’ rights are protected.

Please contact us to discuss starting the process.

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