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COVID-19 – The impact on commercial and retail tenancies

• 07 April 2020 • 6 min read
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COVID-19 has, and will continue to have, significant impacts on commercial and retail leases for both landlords and tenants.

Proposed Government Mandatory Code

The Prime Minister has announced that the National Cabinet will this week formalise a mandatory code (Code) for commercial landlords and tenants that will apply to businesses with a turnover of less than $50M per annum and which are signed up to the JobKeeper program.

The Prime Minister noted that the Code would be based on a ‘proportionality principle’ with turnover reduction of the tenant needing to be reflected in the rental waiver of the landlord. While the Prime Minister indicated that the Code would not be prescriptive, the Prime Minister did flag the potential for lease terms to be extended and/or lease payments to be increased for the remainder of the lease term, to make up for revenue lost by the landlord.

However, the Prime Minister also made it clear that tenants not significantly affected by COVID-19 are expected to honour their lease agreements.

While details of the Code are yet to be confirmed, it is expected that the Code will include the following items:

  • short term temporary moratorium on eviction for non-payment of rent for commercial tenancies impacted due to COVID-19
  • part deferrals and part waivers of rent
  • relief for landlords from the payment of land tax, council rates and other statutory outgoings.

Any Code will raise a number of significant issues for both landlords and tenants, as well as existing mortgagees.

Each of the various State Governments are also likely to enact new laws either in accordance with, or in addition to, the Code. New South Wales and the ACT have already enacted their own laws following previous media announcements. This will also add a further layer of legal complexity for both landlords and tenants, particularly those with properties in multiple jurisdictions.

Leases to which the Code does not apply

Because of the non-application of the Code to businesses with turnover of more than $50M per annum or which are not signed up to the JobKeeper program, there will be landlords and tenants which will remain governed by the terms of their individual leases and the relevant legal principles which apply to those leases. The following legal principles will apply to most commercial and retail leases:

  • Closure of buildings – the statutory powers of the Federal Government and the Victorian State Government include the power to control access to large places of gathering, including commercial office premises, and the power to require those places to close. Any order requiring closure is binding on both the landlord and the tenant. A closure of a building or premises in accordance with a Government direction is an action outside the control of both the landlord and the tenant and will not constitute a breach of the covenant for quiet enjoyment by the landlord. A tenant will have no claim against the landlord for a breach of quiet enjoyment in these circumstances.

In the absence of a Government closure direction, landlords are required to keep buildings open for tenants to access their premises and maintain services to those premises, in accordance with the requirements of each lease. A failure to do so may expose the landlord to a claim by the tenant for a breach of the covenant of quiet enjoyment.

Tenants also need to consider the application in a lease of a positive obligation to trade if a tenant unilaterally decides to close the premises.

  • Payment of rent and outgoings – unlike other contracts, leases do not typically contain a force majeure clause that would cover the circumstance of forced closure of premises. Most leases will not contain any provision allowing for rent and outgoings to abate if a tenant cannot use or access the premises or the building, unless the reason preventing access is damage or destruction to the premises or the building. Accordingly, a tenant will not be entitled to any relief from the payment of rent or outgoings under the lease even if it is unable to access the premises or operate its business from the premises as a consequence of a forced closure due to COVID-19.

Statements by tenants that they will not be paying rent due to COVID-19 eg recent statements by some major retail chains, are a clear breach of lease and may constitute repudiation entitling a landlord to terminate the lease and sue for damages.

  • Ability to terminate lease – typically a tenant will not be able to terminate a lease on the grounds that it is unable to access the premises and/or operate its business from the premises as a consequence of a forced closure due to COVID-19. It is also highly unlikely that a tenant would be able to rely on the common law doctrine of frustration to terminate a lease because the tenant is unable to access the premises and/or operate its business from the premises.
  • Negotiation of rent relief – negotiation of rent relief or deferral is a matter for negotiation between each landlord and tenant on a case by case basis. While many landlords have negotiated rent holidays or short term rent reductions with tenants, there is no legal requirement on a landlord to do so, and there is no standard approach in the marketplace.

Next steps

Each lease needs to be individually assessed to determine whether the Code applies to that lease, what are the practical and legal implications if the Code does / does not apply, and what actions are available to landlords and tenants to achieve appropriate outcomes.

The circumstances are changing quickly, unpredictably and often significantly. If we can assist you in this period or if you have further questions, please contact a member of our Property team.

For similar articles on this topic, please see: Should landlords and tenants wait for government relief in the time of COVID-19 and What you need to know about the emergency changes to tenancy laws – COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW)

Maddocks has produced guides to a range of legal issues raised by the coronavirus (COVID-19). You can access these guides here.

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