March 2020 | Kieran Kelly

As businesses grind to a halt we have received many enquiries in relation to the rights of commercial landlords and tenants as the payment of rent becomes either difficult or impossible.

The unprecedented measures introduced by the government to stem COVID-19 have already had a catastrophic impact on Australian businesses. The most sharply affected are those whose doors have already been ordered shut. They include pubs, restaurants, cafes, cinemas and gyms. As the economy slows and restrictions tighten a raft of other businesses will struggle to generate sufficient income to cover their ongoing expenses.

The question we are now being asked is whether a tenant during this unprecedented crisis is entitled to either walk away from their lease or seek relief from the payment of rent?

Force Majeure clause?

A Force Majeure clause is a clause that seeks to protect parties adversely affected by occurrences that are unforeseen or unavoidable. Typical examples of such occurrences are natural disasters or wars. If such events take place, the Force Majeure clause releases the parties from some or all of their obligations under the contract.

However, while anyone considering entering into a lease now might consider including such a clause in light of the current situation, typical commercial leases have historically not included Force Majeure clauses.

Therefore, unless your lease is highly unusual, you will need to consider the doctrine of frustration.

Frustration

Frustration is a contract law doctrine that allows a party to terminate a contract in circumstances where, despite no fault of either party, a contractual obligation is not capable of being performed. One famous case involved a contract for the hire of rooms overlooking the Coronation procession of King Edward VII in 1902 being frustrated due to the King falling ill.

However, prior to a 1981 decision of the House of Lords it was thought that the doctrine of frustration did not apply to leases.

While it is now accepted this is no longer the case, as was said by Ipp J in City of Subiaco v Heytesbury Properties Pty Ltd [2001] WASCA 140: “[t]he cases in which the doctrine of frustration could properly be applied to leases are extremely rare”.

Whether the doctrine of frustration can be enlivened in the context of the coronavirus pandemic will depend on the lease in question and factors such as its length, the type of lease and the length of time the coronavirus pandemic continues.

If the government lockdowns are for a relatively short period of time (months, not years), it is very unlikely that typical commercial leases would be deemed frustrated and they will therefore continue.

You might then ask, what should landlords and tenants do if the tenant simply is not in a position to pay rent due to the coronavirus?

Negotiation

To the extent possible, now is the time for landlords and tenants to avoid disputes.

The relationship is one of symbiosis and both rely heavily on each other, particular during tough times. As everyone is acutely aware, these are particularly tough times.

We suggest that if it appears likely that a commercial tenant will be unable to pay rent as it falls due as a result of lost revenue, an honest and frank conversation take place about possible alternatives. This might include a temporary moratorium on the payment of rent or an agreement to apply a security deposit amount towards rent.

Whatever the discussion entails and any agreement that is reached must be properly documented to ensure there are no later disputes.

These extraordinary times will end and it is vitally important that relationships between commercial landlords and tenants remain intact at the other end.

Please do not hesitate to contact Jonathan Harris or Scott Freidman on (02) 9231 2466 if you have any questions in relation to a commercial lease.

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