Landlords are facing a range of issues including reduced office occupancy, business continuity concerns in certain sectors and trying to navigate how to respond most appropriately to their tenants’ requests. That said, commercial tenants are facing their own brutal challenges. Here at LSL, we have been providing advice to parties guiding them through these challenges and working to provide solutions, including binding agreements where landlords and tenants agree to a set period of rent relief. See below for further information regarding opening and maintaining premises, abatement of rent, force majeure and more.
Opening of premises
If the lease obliges the tenant to keep the premises open or to actively trade, subject to relevant retail legislation, a tenant’s decision to voluntarily close its premises due to the pandemic COVID-19 would breach this obligation. However, Australian courts tend to order specific performance and injunctions compelling a lessee to trade in exceptional circumstances only. Damages would be the usual remedy. Other than in a shopping centre, it is hard to see that the landlord has suffered any loss.
That said with the government-mandated closures, it is unlikely the landlord would be able to enforce an obligation for the tenant to keep the premises open or to trade.
Deep cleans and more frequent cleans
Although deep cleans and more frequent cleans are more than originally contemplated, we expect that these costs would be recoverable by a landlord where cleaning is a tenant outgoing. This would align with keeping the premises safe and tidy, and, for landlords, managing the building in a professional manner.
Further, although the answer will always depend on a case by case basis, duty of care to visitors to staff and visitors come into consideration here and in the current pandemic cleanliness and OHS considerations should prevail over costs.
Abatement of rent
The abatement of rent clause in Victoria usually operates when the property has been damaged (eg s 57 of the Retail Leases Act 2003 (Vic)), destroyed or inaccessible rather than in a public health event such as a pandemic. However, it is best to check your lease for the abatement clause as it could include a force majeure type of trigger for abatement. One might expect the Government to make an announcement on this in due course. For retail tenants especially, be prepared to go to VCAT for an injunction if the landlord is threatening to re-enter. And tell the Landlord that you are doing that. We are happy to assist.
We have started to work with landlords who are actively seeking to work with their tenants to agree to rent relief by entering into binding short form agreements where the parties agree to delay or suspend part or whole rent payments for set periods. If you are interested in assistance with this, please contact us.
As force majeure is a creature of contract, it must be expressly set out in the lease to apply. Check your lease for a force majeure clause however it will be unusual if one exists. If such a clause exists, then review the clause to ensure that it contemplates a pandemic as a trigger event and ensure you follow the timing and notice requirements. If you do not follow the requirements set out in the clause, for instance you do not give notice as soon as you are aware of the force majeure event, then your ability to rely on the clause can be defeated.
That said, it is rare that a force majeure clause is found in a commercial lease.
If abatement is unavailable and no force majeure clause exists, the next legal consideration will be whether a lease can be frustrated at common law if the tenant is unable to trade on account of mandatory closures.
If your contract does not include a force majeure provision, another option is to investigate whether the contract can be terminated (or rent suspended) for frustration.
A contract is frustrated where a supervening event occurs which so fundamentally or radically affects the performance of the contract that in the eyes of the law the contract ends and both parties are discharged from any future duty to perform. The legal consequence is that the contract is automatically terminated at the time of frustration (not from the beginning) – there is no duty to renegotiate the contract, nor will a Court modify the contract terms.
Frustration is difficult to establish, it does not apply to hardship alone (however severe or burdensome), and it is narrowly and strictly applied by common law Courts. However, one can expect tenants to receive a good hearing at present.
Regardless of an event occurring without fault, frustration requires that performance in accordance with the contract has become commercially impossible, that is, impracticable in a legal sense. The party seeking to prove frustration must show that the parties never agreed to be bound in the fundamentally different situation that had unexpectedly occurred. Showing that it is just and reasonable to qualify the terms of the contract will not be sufficient to gain relief – rather the party seeking relief must show that on the contract’s true construction, the contract no longer applies.
As frustration operates to automatically end the lease contract, we expect that tenants will resort to this to, at worst, seek termination and, at best, use as a commercial lever to seek rent relief.