COVID-19: Landlords, tenants and commercial leases

Impacts and obligations on landlords, tenants and commercial leases 

Landlords are facing a range of issues arising from COVID-19, including reduced office occupancy, business continuity concerns in certain sectors and how to respond most appropriately to their tenants' requests. At the same time, tenants are trying to understand what their rights are, including rent abatement and insurance protection, among others. Below, we examine the respective rights, obligations and liabilities under the new circumstances.

We also consider the Mandatory Code of Conduct for commercial leasing (the Code) released by the National Cabinet on 7 April. The Code provides that during the COVID-19 pandemic, landlords must not terminate leases or draw on security if a tenant fails to pay rent; landlords must reduce rent proportionately to the reduction in the tenant’s turnover, through waivers or deferrals of rent (where waivers of rent must account for at least 50% of the total reduction in turnover, and repayment of rent deferrals must be amortised over the greater of the balance of the lease term or 24 months); and there will be a freeze on rent increases. The Code raises many questions for the industry.

Your key questions answered on landlords, retail landlords and tenants issues

Contact: Michael GravesAnnabelle AlandVictoria HolthouseChristine Adamson
Last updated: 25 March 2020

 

Landlord issues

Can a landlord use its covenant for quiet enjoyment?

IT DEPENDS

If a landlord elects to close all or part of the premises, tenants may be able to claim against the landlord for breach of the covenant for quiet enjoyment; this could include a claim for loss of income. Some tenants might be impacted more than others, particularly if there is only a partial closure. Depending on the wording of the lease, the landlord may be entitled to close the premises in cases of emergency or restrict access to common areas; this may preclude a claim for breach of quiet enjoyment. If a landlord is forced to close the premises due to a government order, depending on the provisions of the lease, complying with this order may not breach the quiet enjoyment covenant. Usually, leases will include a provision requiring both parties to comply with all relevant laws, meaning that tenants would also be obligated to adhere to any government ban and vacate the premises as required.

Can a tenant claim frustration?

IT DEPENDS

Frustration brings a contract to an end where, through no fault of either party, an intervening, post-contractual event has occurred which makes performance of the contract impossible or radically different. Whether frustration has occurred will depend on the terms of the lease and circumstances of the case. While there may be an argument that a government ban on occupation of, or trading from, the premises could frustrate the lease agreement, frustration has a narrow scope and is difficult to establish. Case law indicates that a temporary change, such as the short-term closure of rented premises, would ordinarily not be enough to frustrate a lease. It is likely the lease will continue during any period of forced closure.

Is it possible to request rent reduction or abatement?

IT DEPENDS

As mentioned above, due to the very limited application of frustration to leases, tenants will continue to be bound to pay rent under the lease even if they are unable to use the premises during a period of closure. Whether they are (strictly) entitled to a rent abatement or other concession will depend on the exact wording of the lease. Given the highly unusual and rapidly evolving circumstances of the COVID-19 outbreak, landlords may wish to consider all options, including potentially reaching a commercial arrangement on payment of rent.

Can I enforce my Tenant's obligation to keep the premises open?

NO

If the lease includes an obligation on the tenant to keep the premises open or to actively trade from the premises, a tenant's decision to voluntarily close its premises due to the spread of COVID-19 may (depending on the relevant retail legislation if the shop is a retail shop, the wording of the clause and any carve out) breach this obligation. However, Australian courts have stated that specific performance and injunctions compelling a lessee to trade will only be ordered in exceptional circumstances. This means the landlord would be unlikely to obtain a court order to force the tenant to re-open (although they may have a damages claim). In the event of a government-mandated closure, it is unlikely the landlord would be able to enforce an obligation on the tenant to keep the premises open or to actively trade from the premises. The tenant's obligation to comply with all relevant laws would likely trump the keep-open obligation.

Will the costs of deep or more frequent cleaning be recoverable?

YES

Most service charges provide for the recovery of cleaning costs. Although deep or more frequent cleaning costs are likely to be over and above those of typical cleaning, they would still be recoverable. Further, an obligation on the landlord to manage the building in a professional manner will usually allow a landlord to recover these costs.

Do I have obligations to tenants’ employees?

IT DEPENDS

Usually, it will be for the tenant to consider any threat to the health and safety of its employees. However, landlords who are employers will also have duties of care to their staff and others (including visitors) to the extent that they exercise control over parts of premises (eg common parts). See our issues in the workplace section for more.

What does the Federal Government's announcement in relation to food courts mean for me?

On 24 March 2020, the Prime Minister announced that food courts in shopping centres will be closed nation-wide. No time limit was given to this closure. Your lease will likely contain a clause that requires you, and the tenant, to comply with all laws and requirements of authorities from time to time that relate to or affect the premises. If you are the landlord of premises with a food court, you and, importantly, your tenant, will need to comply with this order. We do not consider that the order from the Government will entitle the tenant to rent abatement for the period of the closure, nor give rise to a claim by the tenant for compensation under the retail legislation. In addition, a temporary closure of this nature will likely not result in frustration of the lease. However, it is possible that an extended closure might result in frustration of the leases. You should also note that such a closure will likely not result in you, as the landlord, breaching the lease by failing to allow your tenants the benefit of quiet enjoyment, or by failing to operate the centre. 

You should also be aware that this is most likely not the last of the Federal Government's announcements in relation to shopping centres. The Prime Minister indicated that landlord and tenant issues will be considered in the National Cabinet meeting on 25 March 2020.  

 

Retail landlord issues

Will landlords need to pay compensation to tenants if shopping centre are required to close or where a landlord chooses to close a shopping centre due to Covid-19?

IT DEPENDS

The Retail Legislation in all jurisdictions of Australia include provisions requiring compensation to be paid to tenants including situations around business disturbance. While the various provisions have a common theme there are some important differences, particularly around exceptions for emergency situations.

The Retail Legislation

In NSW, s34 of the Retail Leases Act 1994 (NSW) provides that a landlord must pay reasonable compensation for any loss or damage suffered by a tenant if the landlord:

  1. inhibits access to the shop in any substantial manner; or
  2. takes any action that would inhibit or alter, to a substantial extent, the flow of customers to the shop; or
  3. unreasonably takes any action (considering recognised shopping centre management practices) that causes significant disruption or has a significant adverse effect on, trading in the shop; or
  4. fails to take all reasonable steps to prevent or put a stop to anything that causes significant disruption of, or which has a significant adverse effect on, trading in the shop and that is attributable to causes within the landlord’s control.

Note that the section specifically refers to actions taken by the landlord.  This is consistent across all jurisdictions.

In WA, in addition to the above, the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) specifically provides that any provision in a lease which requires a tenant to open a retail shop at specified hours or times is void.  Accordingly, where a tenant wishes to close for any reason in WA (not just as a result of Covid-19) a landlord cannot insist that the tenant continue to trade.

Exception for Emergency

There is an exception for an emergency situation in NSW, Qld, Vic, SA, the ACT and the NT (but not WA or Tas), if the action taken by the landlord was a reasonable response to an emergency situation or to comply with a requirement of a relevant Authority or an Act.

What might be considered an 'emergency situation' is not defined in the Retail Legislation but there are arguments that a global pandemic could be classified as an emergency situation. 

Certainly it is clear that where a shopping centre is required by a public authority to close the exception would apply.

Where a landlord chooses to the whole or part of a shopping centre is a little more problematic and would require consideration of the situation at the time the decision is to be made as the Covid-19 situation is changing very quickly. 

What to do now

Landlords should follow and monitor all public health announcements and carefully consider all aspects before making any decision to close any part or the whole of a shopping centre.  Landlords should weigh up the prospect of the infection of customers, tenants and staff in the Centre against the business disruption.

 

Tenants issues

Will I be subject to any statutory orders closing down my business or centre?

YES

The statutory powers of the Federal Government, as well as the State and Territory Governments, will be broad in relation to the COVID-19 outbreak. These powers will include controlling access to large places of gathering (which could include shopping centres) and other statutory evacuation orders and/or ongoing restriction of movement orders. As tenants, you should be aware of the possibility of forced closures and/or openings expected to impact centres and your premises.

Will there be impacts of these potential statutory orders on my rights as a tenant?

YES

Your lease will likely contain a clause that requires you, as the tenant, to comply with all laws and requirements of authorities from time to time that relate to, or affect the premises. In the event that the landlord's premises are the subject of a statutory evacuation order and/or an ongoing restriction of movement order, you (and the landlord) are obliged to comply with that order.

Should a relevant authority issue such an order in respect of your landlord's centre, it is our view that the order, and the subsequent temporary closure of the centre would not:

  1. result in the landlord breaching the lease by failing to allow the tenant the benefit of quiet enjoyment;
  2. result in the landlord breaching the lease by failing to operate the centre and to provide essential services;
  3. result in the tenant breaching the lease by failing to continue to trade;
  4. entitle the tenant to rent abatement for the period of the closure;
  5. give rise to a claim by the tenant for compensation under the retail legislation (as complying with such a statutory order would likely fall within the relevant emergency carve out clause in your state's relevant retail legislation); or
  6. result in the frustration of the lease.

Accordingly, by complying with a statutory order of closure or evacuation, neither party to the lease could be considered in breach of its respective obligations.

As you will be aware, on 24 March 2020, the Prime Minister announced that food courts in shopping centres will be closed nation-wide. We consider that the above will apply in relation to such an order.

You should also be aware that this is most likely not the last of the Federal Government's announcements in relation to shopping centres. The Prime Minister indicated that landlord and tenant issues will be considered in the National Cabinet meeting on 25 March 2020.  

Can the landlord voluntarily and pre-emptively close the centre and/or my premises?

IT DEPENDS

A landlord may voluntarily decide to close all or part of a centre in response to the risk of COVID-19 spreading, without the centre being subject to a statutory order. This may occur because the landlord is mindful of the spread, or is aware of a high number of infected persons in a particular tenancy, or in the centre generally.

The landlord's action might be in breach of the covenant of quiet enjoyment. It will be a question of fact and degree.

If you are party to a retail lease, your relevant state's retail legislation will likely provide that you will be compensated for interference caused by your landlord. Interference includes, for example, substantially inhibiting your access to the premises. This may, however, be subject to some exceptions.

Can I rely on my rent abatement clause?

IT DEPENDS

You should seek advice on the particular rent abatement clause in your lease. Your lease may contain a damage and destruction clause. It may provide for the lessee to receive a rent abatement if the centre or the premises are damaged or destroyed so that the premises cannot be used or are inaccessible. We do not think that this clause would apply in the various scenarios so far contemplated. Even if a centre was the source of a COVID-19 outbreak, neither the centre nor the premises can be considered damaged or destroyed.

Can I cease trading due to concerns about the coronavirus?

NO

If you simply cease trading because of a fear of COVID-19, it is our view that you would be in breach of your relevant trading obligations under the lease. Of course, if your lease is a retail shop lease it would be subject to any provisions in the relevant Retail Legislation to the contrary including any trading obligations.  

In circumstances where your landlord continues to comply with its duties, for example, regularly cleaning the common areas and servicing facilities, would make it difficult for a tenant (if any) to argue that the contraction of the virus by staff members or members of the public known to have frequented the centre, or the risk of the contraction of the virus, excuses the tenant from complying with its trading obligations under the lease.

If you did notify the landlord of the contraction of the virus by one or more of its staff members and your consequential decision to cease trading, it would be a commercial/public relations matter for the landlord as to whether it wishes to enforce your trading obligations.

Please also keep in mind that as an employer, you have a primary duty to ensure, as far as reasonably practicable, the health and safety of your employees and all persons in your workplace. See our issues in the workplace section for more.

Can I walk away from my lease by arguing that there has been a "force majeure" event?

NO

There is no common law doctrine of force majeure. It is instead the subject of a contractual agreement between the parties and comes down to matters of interpretation. The ability to rely upon the doctrine of force majeure will depend upon whether your particular lease has a relevant force majeure clause. Such clauses are however, rarely included in standard commercial leases.

Can I walk away from my lease by arguing that the lease is frustrated?

NO

It is a high hurdle for an aggrieved party to demonstrate that a contract has been frustrated. Frustration brings a contract to an end in circumstances where an intervening, post-contractual event has occurred, through no fault of any party, by which performance of the contract has become impossible, or radically changed. Temporary change such as a short term closure of premises would ordinarily not amount to frustration.

We appreciate that at the time a statutory order is issued, it may not be known when the centre can be re-opened. We would expect it would only be a matter of days or weeks. In these circumstances, we do not consider this will result in frustration of the lease. While it seems unlikely that a centre would be closed for an extended period of time, it is possible that an extended closure might result in the frustration of the leases. This would need to be considered further.

Can we assert unconscionable conduct in circumstances where a landlord insists on rent in circumstances where we cannot enjoy the benefit of the lease?

IT DEPENDS

Where a statutory order prohibits trading from a leased premises, it is our view that it would not be unconscionable conduct for a landlord to seek to recover rent from you for a period of time in which you have been unable to trade (we consider this to be the case in relation to both retail legislation, and the Australian Consumer Law).

We say this because, while it may be unfair for you to have to pay rent when you are prevented by the statutory order from earning revenue, the landlord is also subject to that order and would likely be ready to perform its part of the bargain. Requiring rent to be paid is the landlord's contractual right, and it is difficult to see what the alleged loss would be, considering you as the tenant were already obliged to pay rent by the terms of the lease.

Be aware of the other side. It could be asserted that it was unconscionable conduct for a tenant to refuse to pay the landlord any rent, not because of any wrongful conduct of the landlord, but because a government order has prevented it from trading.

Will I be covered by my own insurance?

IT DEPENDS

We expect that coverage under existing arrangements will be called into question. In particular, we expect that disputes will arise around whether a pandemic is an insurable event, or whether a loss period is subject to a blackout while the event occurred. You will need to consider whether your particular insurance policy covers losses suffered during a disease outbreak. Be aware that it is common for policies to exclude losses caused directly or indirectly by a disease outbreak. However, your insurance policy may provide for business interruption coverage, which protects businesses against losses incurred as a result of disruptions to their operations. These policies, however, typically require direct physical loss of, or damage to, insured property to trigger coverage. You should review your insurance policy carefully.

 

Your key questions answered on commercial leases

Contacts: John BeckinsaleAnnabelle AlandLiam ChambersVictoria HolthouseNigel PapiDavid McLeishMichael GravesTim ChislettAnne MontesanoKaryn Thomson

Last updated: 14 April 2020

Who does the Code apply to?

IT IS UNCLEAR

The Code expressly applies to tenants of commercial, retail and industrial premises that are eligible for the Federal Government's JobKeeper program and have a turnover of $50 million or less.

The Code also states that its principles should apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses. We expect a number of tenants will seek relief in line with the Code even if they are not strictly eligible.

There is a push by the Property Council of Australia for the state and territory governments to include, among other things, exemptions for small owners from the Code.

When does the Code become binding?

IT IS UNCLEAR

The Code will be given effect through relevant state and territory legislation, or regulation as appropriate, from a date after 3 April 2020.

We are waiting for clear guidance from the states and territories as to their proposed timing. However, we anticipate that the legislation is likely to apply retrospectively from the date of the Code.

How long will these arrangements last?

IT IS UNCLEAR

Arrangements under the Code will last for the period during which the JobSeeker program remains operational and must take into account a subsequent reasonable recovery period.

The Code does not provide any guidance as to what constitutes a 'reasonable recovery period', so this will have to be agreed on a case-by-case basis. For instance, this could be an agreed number of weeks or months after the relevant state of emergency has been lifted, achievement of a defined revenue or a reference to foot traffic at the premises.

How do you calculate the rent relief required under the Code?

IT IS UNCLEAR

The Code specifies that landlords must offer tenants proportionate reductions in rent, based on the reduction in the tenant's trade. The Code does not provide guidance as to how a reduction in trade should be measured, so this will need to be agreed by the parties.

The concept of a reduction in trade is perhaps easier to understand and measure in a retail environment, where a tenant may be prevented from trading from particular premises due to the government-imposed shutdown or the partial or full closure of a shopping centre. This concept may be more difficult to measure for commercial or industrial leases that are not dependent on foot traffic to drive revenue. Given this, care will need to be taken to agree mechanisms that are both transparent and fair, and reflect the underlying principle that the Code is seeking to address the impact of the COVID-19 pandemic.

While the Code requires landlords to offer reductions in rent based on decreases in trade, it also requires arrangements to have specific regard to the impact of COVID-19 on the tenant's expenses and profitability. While expenses are discussed below, the Code provides no guidance as to how tenants should be compensated for falls in profitability. This will need to be considered on a case-by-case basis but, in most cases, can, hopefully, be factored into the agreed rent reduction.

Does the Code affect outgoings?

YES

The Code specifies that a landlord must pass on to the tenant any reduction in statutory charges that it receives (such as land tax and council rates) proportionate to the way in which outgoings are calculated under the relevant lease.

The Code also specifies that landlords should, where appropriate, seek to waive recovery of any other expense payable by a tenant during any period where the tenant is not able to trade and that landlords reserve the right to reduce services as required.

In what circumstances can a landlord evict a tenant?

FOR ANY REASON ALLOWED UNDER A LEASE, OTHER THAN NON-PAYMENT OF RENT

The Code specifies that landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (and the reasonable subsequent recovery period discussed above). This includes non-payment of any re-negotiated rent.

The Code also specifies that tenants must remain committed to the terms of their lease, subject to any amendments negotiated under the Code, and any material failure to abide by substantive terms of a lease will forfeit any protections provided to the tenant under the Code. This means that landlords can still terminate leases for a breach (other than non-payment of rent), provided it is a material breach of a substantive term. It will therefore be important to overlay these concepts of 'material' and 'substantive' over the existing default and termination provisions in the relevant lease, when considering whether to take steps to terminate the lease.

While the Code prevents the landlord from drawing on security for non-payment of rent, there is no restriction on drawing on security for other breaches of the lease by the tenant.

Are tenants entitled to a lease extension?

YES

The Code specifies that a tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period. Given the uncertainty regarding how long the rent waiver and/or deferral period will last (and requirements in retail leases legislation), parties will need to be careful how they structure these arrangements.

Is there an obligation on landlords to revisit the arrangements?

IT IS UNCLEAR

The Code requires the reductions in rent to be linked to a tenant's fall in revenue and, given that revenue is likely to change over time, the likelihood is that any fixed arrangement would need to be revisited, if revenue falls further or improves.

The need to revisit agreed arrangements may be avoided by structuring them so that the quantum of rent relief is calculated on a rolling basis that takes into account the tenant's actual revenue at any given time.

Does the rent freeze prohibit rent reviews?

YES AND NO

The Code specifies that landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.

There is no equivalent freeze on rent reductions, which may be the outcome of market rent reviews that fall during the operation of the Code. To avoid this, landlords may seek to agree to defer all rent reviews, including market reviews, until application of the Code ends.

What happens to COVID-19 arrangements already entered into?

IT DEPENDS

Following the advice of Prime Minister Scott Morrison on 29 March, many parties have already entered into rent relief arrangements. If the terms of the arrangements comply with the Code, those arrangements may remain on foot. However, if the arrangements do not comply with the Code, the parties will need to enter into new compliant arrangements.

There is, however, a push from the Property Council of Australia for the state and territory governments to recognise arrangements that have already been put in place.

Is the state or territory legislation likely to clarify any of these issues?

IT IS UNCLEAR

To quote the Code itself, 'the Code has been developed to enable both a consistent national approach and timely, efficient application'.

It is currently unclear whether the states and territories will pass legislation that has the effect of simply giving the Code legislative effect (ie adopting the Code as is), or whether they will seek to clarify through legislation some of the uncertainties created by the Code.

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