The current COVID-19 situation brings uncertain and unsettling times.
Rigby Cooke has received several enquiries from landlords and tenants alike regarding their rights and obligations under their lease.
From tenants: Do I have an obligation to continue paying rent if I can no longer generate an income due to the mandatory controls imposed by the government?
From landlords: Can I (or my tenant) terminate a lease in such a situation?
Obligation to pay rent
The Federal government has announced measures to assist commercial tenancies during this period.
Such measures include changes to the Bankruptcy Act 1966 (Cth) for a period of six months. These temporary measures include increasing the minimum amount of a statutory demand for non-payment of debt from $2,000 to $20,000 and to allow six months for payment (as opposed to the current 21 days). It has also been suggested that a moratorium may be introduced on the termination of certain leases for non-payment of rent.
As these measures only operate when a lease is in default for non-payment of rent, it is our view that these measures should only be relied upon as a last resort in a worst-case scenario. This default may affect any future rights under the lease.
Subject to any Government measures that may be implemented in the future and unless specifically provided for under the lease with all else remaining unchanged:
- the lease obligations will continue; and
- a tenant will be required to continue paying rent and outgoings under the lease.
However, if a tenant defaults, it may not be in the best interests of either party for the tenant to be issued with a default notice – undoubtedly so for a tenant but, for a landlord, it may also mean having to find another suitable tenant, which may prove difficult in itself given the current times.
At this time, landlords and tenants should both consider how their respective businesses are impacted by the current economy. Any impact to your business may not be immediate and may be caused indirectly. Parties should consider their cash flow immediately and limit spending where able to do so.
Our recommendations include:
1. Prepare early and strategise
Review your lease and assess your position. Will you or your tenant be able to pay rent (considering the business closures or potential lockdown)?
If not, possible options would be for a tenant to seek or for a landlord to offer (whichever applies):
- A rent relief period so that the tenant pays reduced rent during this period and, when this period expires, the reduction can be repaid as a lump sum or as instalments;
- A rent reduction period if a tenant’s business is no longer able to trade or a lockdown occurs;
- A turnover rent period so that a tenant pays a nominal base rent plus a rent calculated on the tenant’s turnover; or
- A combination of any of the above.
Tenants should also consider reviewing their business interruption insurance.
2. Negotiate in advance
Do not wait. Make the call to your landlord (or the tenant, as the case may be) to renegotiate terms that both parties will be comfortable with and to provide certainty for both parties that the lease will continue.
With a well-considered strategy and professional negotiations, parties will be more willing to negotiate on new terms as this will also allow both parties the ability to manage its own commitments to other parties.
3. Formalise any new terms in writing
Any variation to the lease terms (including a revised payment plan) should be formalised in writing by varying the lease.
4. Provide updates
Have open and early discussions so there is a mutual understanding of any issues each party may face and how, if any, assistance can be provided.
Right to terminate
With recent business closures announced and more expected to come, there have been questions asked about the operation of the legal concepts such as frustration and force majeure to terminate a lease.
- Frustration occurs when, without a default of either party, the lease becomes impossible to perform and the parties will be released from the lease. The circumstances for this doctrine to apply are very limited.
- While there is a possibility that the Courts may view a lengthy business closure as a reason for frustration of the lease, we again recommend that parties consider negotiation as a better long-term solution to meet their lease obligations. As the outcome for this legal concept is termination of the lease, it is not a viable long-term solution for most.
- Force Majeure is largely limited to acts of god, war, civil unrest and generally only applies to destruction and inability to use the Premises. We are unaware of any lease that includes a pandemic as a force majeure event. The ability to rely upon the doctrine of force majeure will depend upon whether a lease has a relevant force majeure clause. Such clauses are however, rarely included in standard commercial leases.
With business closures and the looming possibility of a lockdown, we strongly urge business owners to reassess your business strategies in light of your rights and obligations under your lease.
As new information and government initiatives constantly emerge, this may all change again.
Rigby Cooke is here to assist and will continue to update you as the situation progresses.
If you would like advice on formulating your lease strategy and an experienced negotiator to liaise with your landlord or tenant, please contact a member of our Property team.
|Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.
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