In this publication, we have sought to answer and comment on some frequently asked questions in relation to landlord and tenant rights, responsibilities and obligations in the current COVID-19 pandemic.
Much of the following discusses the relevant issues at a high level. Individual rights, obligations and responsibilities will need to be considered on a case by case basis by reference to the facts and the terms of the relevant lease.
Can a tenant lawfully suspend payment of rent and other amounts payable under a lease during the COVID-19 pandemic?
If there is a right to suspend or abate rent or other payments in a lease, this will usually only apply where premises cannot be used or accessed because of some damage or destruction event affecting the premises or the building in which the premises are located.
Leases do not typically include a right to suspend or abate rent and other payments in circumstances where the use of premises is impacted by matters other than physical damage or destruction such as cases of pandemics.
What rights does a landlord have if a tenant stops or reduces rent payments?
Generally non-payment of rent is a breach of an essential term of a lease, which may entitle a landlord to re-enter and bring the lease to an end and/or bring an action against the tenant for damages. Damages following termination may include the difference between the rent payable under the lease for balance of its full term and the rent the landlord receives from a new tenant, subject to an obligation on the landlord to mitigate its loss.
It is important to recognise that if a landlord does terminate the lease, a tenant may be entitled to seek relief against forfeiture. This is an application to the Courts to seek for the lease to be reinstated. Ordinarily, the Courts are prepared to grant relief where the breach for which the lease has been terminated has not been a consistent breach and the tenant is able to demonstrate that it is able to continue to comply with lease terms.
It is also important to note that the law may soon change as regards to a landlord's termination rights. On 25 March 2020 the NSW Parliament passed the COVID-19 Legislation Amendment (Emergency Measures) Bill 2020 (Emergency Measures Act) as part of the State Government's response to the COVID-19 pandemic which enables the Minister under certain occupancy legislation to make regulations prohibiting the usual powers of a landlord or owner to recover possession of premises or terminate leases, in particular circumstances. At the time of writing, no such regulations have been made. However, the potential scope of the proposed short-term regulations do strongly suggest the intentions of the State Government.
Broadly speaking, the Emergency Measures Act enable regulations to be made under the Relevant Acts which:
- prohibit the recovery of possession of premises by a landlord or owner of premises;
- prohibit the termination of a lease or tenancy by a landlord or owner;
- regulate or prevent the exercise or enforcement of another right of a landlord or owner; or
- exempt a tenant or class of tenants from the operation of a provision of relevant Acts or any agreement relating to the leasing or licensing of premises.
The power to make these regulations may only be exercised in "particular circumstances". This phrase is not defined in the Act and remains to be determined by the regulations. Any regulations made under these new powers will expire 6 months after the day on which the regulation commences, or earlier by resolution of either house of parliament.
Can a tenant close their premises without being in breach of their lease, and what can a landlord do if a tenant does close?
It will depend on the terms of the lease, any relevant government authority notices or orders that is imposed on the premises or the tenant and factual circumstances regarding health and safety.
Some commercial office leases and most retail leases place an obligation on tenants to open and, in the case of retail leases, trade from their premises during prescribed hours. In the absence of such an obligation, a tenant will ordinarily be able to cease their occupation or operations from their premises.
If the lease does include an obligation on the tenant to remain open or trade from the premises during prescribed hours, a closure by the tenant would be a breach of the lease which may entitle a landlord to exercise similar rights as those for non-payment of rent, subject to our comments below where the closure is mandated.
What if a tenant's obligations to obey the law is inconsistent with an obligation to trade under the lease?
Apart from each person's duty and responsibility to comply with laws at large, most leases will require the tenant and the landlord to obey the law including notices and orders from government authorities. To the extent there is any inconsistency between a lease obligation to continue to keep premises open or to trade and obligations at law, this can be contentious but complying with the law will arguably prevail.
Hence, if the law requires that certain premises may no longer remain open (e.g. bars, cafes and restaurants under current COVID-19 restrictions) or if a genuine work health or safety issue arises, a tenant can arguably close its premises without being in breach of an obligation that provides otherwise. There may however be no right of rent abatement in these circumstances under the terms of the lease.
Can a landlord close their building or the centre of its own accord or in accordance with a government mandate, and what is a tenant's rights in such situations?
It depends on the terms of the lease.
A breach of a landlord's covenant for quiet enjoyment or non-derogation of grant may occur where a landlord has taken active steps to deprive a tenant of the use or enjoyment of the premises in circumstances where the lease does not permit the landlord to do so. Closure of the building or centre by the landlord except where required to do so to comply with the law or other than in an emergency could amount to such a breach.
Generally leases will contain quiet enjoyment clauses that are qualified by or expressed as being subject to the 'terms of this lease', 'subject to the landlord's rights under this lease' or similar language. The landlord's rights or reservations may include a right for the landlord to act in an emergency or comply with laws that may require the building or the centre to be closed. Building rules that apply under a lease will also need to be considered to determine the scope of the quiet enjoyment provisions in the lease.
In Australia, there is no common law position that supports a tenant claiming a waiver or abatement of rent and other payments under a lease due to adverse trading conditions that do not result from a breach of quiet enjoyment or a derogation of grant by the landlord.
In respect of retail premises, there are limited rights of rent abatement. Section 34 of the Retail Leases Act 1994 (NSW) for instance, allows tenants to seek reasonable compensation where landlords take various actions inhibiting customer-flow to retail shops, except where the landlord's actions are a reasonable response to:
- an emergency situation, or
- in compliance with any duty imposed by or under an Act or resulting from a requirement imposed by a public or local authority acting under the authority of an Act.
What are the obligations of landlords and tenants towards staff and customers during the COVID-19 pandemic?
Work Health and Safety (WHS) legislation in Australia differ in each State and Territory but are broadly in alignment in relation to occupiers of premises (Duty Holder) liability to ensure, so far as is reasonably practicable, that the workplace is without risks to the health and safety of any person. This includes providing and maintaining a work environment that is without risks to the health and safety of guests, customers, clients and employees.
Landlords also have a duty in respect of premises to the extent that they manage and control a workplace. As such, landlords may need to take active steps on WHS in relation to common areas, entrance ways and other shared services.
Most importantly, landlords, tenants and property managers also have an obligation to consult and cooperate with each other and coordinate on WHS matters. Such engagement may need to extend to discussions whether it is appropriate for common areas and/or the premises to remain open in all circumstances relating to premises and the operations from premises including in the context of a large building or centre.
Does the concept of "frustration" apply to leases for the duration of the COVID-19 pandemic?
Frustration is a common law concept and operates in very restricted circumstances to bring a contract to an end where an intervening, post-contract event, has occurred through no fault of the parties, which:
- makes a contractual obligation impossible to perform; or
- transforms a contractual obligation into a fundamentally different obligation.
Case law on to date suggests frustration is unlikely to apply to leases in the context of the COVID-19 pandemic. This is because the effects of the pandemic and any government intervention would merely cause a delay in the performance of the lease (on the basis that the impact is temporary or transient on the overall duration of the term of the lease, which seems to be the case currently with the pandemic), rather than making the lease impossible to perform or creating a fundamentally different obligation.
Can a "Force Majeure" claim be made as a defence to non-payment of rent and/or closing our premises?
There is no common law right of Force Majeure and parties have to agree to include a Force Majeure clause in their agreements if such a principle is to apply. A Force Majeure (FM) clause is a mechanism used in contracts to allocate risk between the parties, typically by excusing one or both from performing its obligations under a contract in some way should defined events occur.
FM clauses are not typically included in leases, although agreements for lease may have extension of time regimes that are invoked if a FM occurs which apply to time critical obligations such as Works Completion Dates or Sunset Dates.
Are any businesses or industries entitled to compensation from the Commonwealth or State Governments in respect of losses associated with COVID-19?
The Australian Government has announced implementation of emergency economic stimulus measures, targeted at welfare recipients and businesses, and is working with State Governments in regard to further response packages. To date, these measures relate to cash payments to welfare recipients, taxation deductions, small business payments, reductions to business payroll tax obligations, waivers of fees and charges and the like. Future stimulus measures are expected to relate to persons and industries most affected by COVID-19, such as tourism facilities, airlines, event facilities and the like.
The Government is currently working on a number of measures to protect businesses in the current crisis. One is to increase 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 – up from the current 21 days. We have discussed above the probable moratorium on termination of certain leases for non-payment of rent. It is anticipated that these measures will apply on a state by state basis. Announcements are being made on a daily basis.
There are legal and more relevantly commercial reasons for both landlords and tenants to engage in dialogue and negotiations during this very difficult period. As the Government continues to formulate responses to cushion the social and economic fallout of this pandemic that may provide some relief for landlords and tenants, it would be incumbent for the property industry to find its own answers and innovative ways towards an equitable outcome for all its stakeholders.