LEASING | COVID-19 | CORONAVIRUS
The Covid-19 outbreak is having a big impact on the ability of many small businesses to keep trading, which affects not only the Tenant but also the Landlord.
Tenants will increasingly be seeking some form of rent abatement or rent deferral from their Landlords to assist with cost management in an effort to keep the business open.
SECTION 1 - GENERAL LEASE COMMENTS
When reading our comments in section 1, which cover some typical leasing provisions and legal concepts - consideration needs to be given to the application of the National Cabinet's Mandatory Code of Conduct, as referred to in Section 2.
The Lease document is a binding contract that exists between the Landlord and Tenant. It is important as a preliminary step that the Lease is reviewed to assess each party's rights and obligations where the operation of the business undertaken by the Tenant is impacted by Covid-19.
Payment or rent (and often outgoings) is a standard obligation on a Tenant as set out in a commercial lease.
Most leases also do not permit the Tenant to withhold payment of rent regardless of the circumstances. Where a Tenant is unable to pay their rent on time, this will be treated as a default under the terms of the Lease.
Where a Tenant fails to pay rent, a Landlord may issue a Form 7 Notice to Remedy Breach of Covenant pursuant to section 124 of the Property Law Act 1974 (Qld). This Form normally sets out:-
the obligation that has been breached by the Tenant;
the Landlord's requirement that the breach be remedied;
how the breach is to be remedied; and
the timeframe by which the breach is to remedied.
Where the Tenant has failed to remedy (for example, pay rent) within the prescribed period, then the Landlord would normally have a right to re-enter and take possession of the Premises, terminate the Lease and seek damages/compensation from the Tenant.
So, there are significant risks for a Tenant under a standard commercial lease where the Tenant fails to pay rent.
Relief Against Forfeiture
It is possible for a Tenant to apply to a court for relief against forfeiture of a lease where the Landlord terminates and re-enters for breach of the covenant to pay rent.
Apart from meeting the criteria to be successful with such an application, this process can be lengthy and costly. From a commercial perspective where a Tenant has reduced income due to either closure of the Business or reduced trading hours , filing an application in court for relief against forfeiture may not in practice be an option a Tenant will want to pursue.
Sometimes contracts include what is called a force majeure clause. This clause allows the parties to end the contract where a party is affected by an unavoidable or unforeseeable event. However, typically such clauses are not included in commercial leases.
Where no force majeure clause is expressed in the Lease, the Tenant would be unable to rely on an excuse for non-payment of rent due to some type of extenuating event, such as, Covid-19.
A legal remedy that some Tenants may be able to turn to is the doctrine of frustration.
In general, the common law doctrine of frustration can cause a contract to come an end where, through no fault of the parties, a post-contract event has either made contractual obligations impossible to perform or it fundamentally transforms an obligation into a radically different obligation.
However, whether a lease can be frustrated will depend on different factors. Generally:
the applicability of frustration to leases remains relatively untested in Australia (but that may change due to Covid-19 and the likelihood of more cases before the Courts on this issue in the future);
a temporary change will also not be sufficient to frustrate a lease; and
the onus of proving that a lease has been frustrated rests with the party seeking to excuse themselves from performance under the lease (so, in the event of non-payment of rent - it would be the Tenant).
In response to the current Covid-19 pandemic, the Australian Government has mandated the closure of certain businesses including cinemas, theatres, pubs, galleries, gyms and other "non-essential" industries.
There may be an argument for frustration where a business is permanently closed (eg. a “cinema” can no longer operate) and without the Tenant having any options for either partial closure or to continue business via alternative means.
Where there is a partial business closure due to the Australian Government’s mandates, there is a question mark whether frustration would apply in that situation, for example:
where a restaurant has been mandated to close its doors to customers but can still offer take-away from the premises; or
a cafe cannot offer a sit-down service for customers, but can still offer take-away coffee.
In general, if a business is able to continue to use and operate from a premises, then a successful argument for frustration is less likely.
SECTION 2 - APPLICATION OF CODE OF CONDUCT
NATIONAL CABINET MANDATORY CODE OF CONDUCT
SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19
To assist Landlords and Tenants in dealing with the impact of Covid-19, the National Cabinet approved a Code of Conduct ("the Code") to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial).
In summary, the Code provides a set of principles to:
assist with negotiating amendments in good faith to existing leasing arrangements; and
aid in sharing the financial burden of Covid-19 between Landlords and their Tenants.
We recommend any agreed change to a lease be done in writing. This could be achieved through an appropriately drafted Deed of Amendment or Deed of Variation.
Contact Greyson Legal to assist you in preparing a Deed of Variation or for other lease advice.
Who does the Code Apply to ?
The Code applies to businesses:
with an annual turnover of up to $50 million; and
are eligible for the Commonwealth’s JobKeeper program
To be eligible for the Commonwealth’s JobKeeper program, a business must have suffered a fall in turnover of more than 30 per cent for at least a month.
In short, the Code provides that Tenants are entitled to a reduction in rent proportionate to the decline in the Tenant’s turnover during the Covid-19 pandemic period and for a reasonable recovery period thereafter.
Tenants who are covered by the Code will be protected from the following during the Covid-19 pandemic period:
termination of their lease for non-payment of rent;
rent increases (turnover rent exceptions apply);
penalties for ceasing trade or reducing opening hours; and
Landlords making a claim on a bond, bank guarantee, security deposit; or personal guarantee - due to non-payment of rent.
For Tenants, they must not terminate their lease and otherwise substantially meet their obligations under the lease in order to receive the benefits prescribed under the Code.
What if a Landlord and Tenant cannot agree ?
Where the Landlord and Tenant are unable to agree on arrangements to apply during the Covid-19 pandemic, either party may refer the matter for binding mediation with the applicable State or Territory retail/commercial leasing dispute resolution body.
What if a Tenant does not qualify under the Code?
The National Cabinet has indicated that during the Covid-19 pandemic period:
the principles of the Code should nevertheless apply in spirit to all leasing arrangements for affected businesses; and
Landlords and Tenants can still use the principles set out in the Code as a framework for negotiating necessary arrangements, such as, rent relief.
Have a leasing query ?
For further leasing advice or help understanding your rights and obligations due to the impact on business arising from Covid-19, contact Greyson Legal.