Can the terms of your lease assist you in these uncertain times?
Following on from our recent article in relation to the government’s attempts to solve tenancy issues, and pending the release of the regulations which set out the details of the government’s aid measures, we strongly encourage both landlords and tenants to consider their situation and start engaging with each other to reach suitable commercial arrangements. If you’re unsure of what these commercial arrangements might look like, we can help you.
Leases should be reviewed to check the wording of any relevant clauses. There may be some terms to look for in your lease. Be aware of what they mean and specifically what they mean to you in this environment. It can go either way for both tenant and landlord. We have outlined these below:
Force majeure - A force majeure clause expressly deals with how certain unforeseeable events and circumstances can impact and affect the performance of the parties’ obligations under the contract. The purpose of a force majeure clause is to relieve a party of liability (e.g. by providing the ability to terminate) if it is unable to perform its contractual obligations (e.g. the requirement to pay rent) due to circumstances beyond that party’s control. While most commercial contracts will contain a force majeure clause, such clauses are not commonly included in leases.
Rent abatement - The only clause that usually provides a tenant with a rent abatement or ability to terminate the lease is the damage and destruction clause. Such a clause is not likely to be applicable here given the premises have not been physically damaged or destroyed. However, the specific drafting of the clause should be reviewed, particularly as it relates to any rent abatement that may be available due to ‘inaccessibility’ of the premises. Such clauses are strictly construed by the courts.
Termination - Some leases may include an early termination clause, which enables tenants to terminate the lease prior to the termination date – but the particular wording of any such clause must be reviewed.
Comply with laws - Tenants whose business and/or premises have been impacted by the government’s forced closures will need to abide by the government’s orders. Leases contain a clause which requires the tenant to comply with all laws, regulations and the requirements of government authorities. While that clause of the lease would permit a tenant to close its doors (and probably prevent a tenant from being in breach of other clauses that require them to open for trade and operate during certain hours), it would not excuse a tenant from continuing to comply with all other lease requirements (including the payment of rent).
Quiet enjoyment - If the premises are closed due to a government order, or if the landlord is required to close the building due to an emergency, then the landlord is not likely to be in breach of its obligation to give its tenant quiet enjoyment of the premises. If the landlord voluntarily closes the premises for some other reason, or no particular reason, then it may be in breach of its obligation to afford quiet enjoyment.
Frustration - Aside from the specific terms of a lease, a tenant could seek termination of the lease on the grounds of frustration. The concept of frustration operates to terminate a contract if, due to the occurrence of an unforeseen supervening event beyond the control of the parties, there is a radical change in circumstances which makes the contract impossible to perform (through no fault of either party). However, it should be noted that frustration is applied narrowly by the courts and in very few situations. A tenant is not likely to be successful in a claim for frustration, given the disruption caused by the COVID-19 pandemic is likely to be short-term. Also, the outbreak of a pandemic probably could not be classified as an ‘unforeseeable’ event (given the SARS and MERS outbreaks) however the responses that we have seen to COVID-19 (including city lockdowns) may be considered as 'unforeseen'.
Monthly tenancies - Many tenants would be holding over as a month-to-month tenant under an expired lease. In this instance, a tenant can easily give one month’s notice terminating the lease and thus relieving themselves from liability to pay rent and outgoings as from the date the lease is terminated. This is a risk for landlords too, as a tenant who could give one month’s notice and walk away may be in a better bargaining position than one that is locked in to a fixed term. Given the current climate, a landlord may find it difficult to secure a replacement tenant.
Make good - Even if a tenant was able to find a way to terminate its lease, it is unlikely that a tenant would want to do this, because it will leave them without a premises and probably result in a total loss of goodwill. The tenant would then be faced with the costs of vacating the premises and ‘making good’, unless the landlord agreed to waive such requirement.
Options to renew - Some tenants may have exercised their option to renew an existing lease for a further term, as such right often needs to be exercised 3, 6, 9 or even 12 months prior to expiry of the lease. If such exercise of option is valid (see our previous article on this point), the parties are obliged to enter into a lease for the option term. An enforceable agreement for lease is created upon exercise of the option, meaning a landlord could still seek to enforce the lease in the absence of a signed document.
Bank guarantees/Security Deposits - Tenants who have provided a security deposit / bank guarantee could ask their landlord to draw on that security if the tenant anticipates it will not be able to meet its obligations under the lease. But the tenant should ensure that it is on the front foot about this, as if the tenant defaults on the payment of rent the landlord is not obliged to call on the security first, the landlord could just terminate the lease and re-enter the premises without notice and the tenant would be left to make a claim to the Court for relief against forfeiture (under s.129 of the Conveyancing Act), which would be a costly exercise.
Landlords who are looking to call on security deposits and bank guarantees if tenants start defaulting should tread carefully. Although calling on security may alleviate short-term cashflow concerns, landlords should assess whether doing so is the best commercial decision in each case.
Calling on a bank guarantee cannot be ‘undone’ if a tenant were to subsequently go under, as it is a third-party guarantee given by the bank and paid from money held by the bank which cannot be ‘clawed back’ by creditors of the tenant. A cash security deposit is the tenant’s money held on trust by the landlord until such time as the landlord may be entitled to call upon the security deposit in the event the tenant defaults. Calling on a security deposit could be ‘undone’ as creditors could claw back the transaction as a preferential payment if the tenant goes under.
Statutory demands - The government’s announcement that it will increase the minimum amount of a statutory demand for non-payment of debt to $20,000 (up from $2,000) and to allow six months for payment (up from the current 21 days), is an indication of the level of liability the government expects a creditor (including a landlord) to expose themselves to before taking action to have a company wound up in the current climate.
Insurance - Both parties should speak to their insurers to canvas whether any claim could be made. Some tenants may have business interruption insurance, and some landlords may hold insurance that covers loss of rent. However, we understand that losses arising out of pandemics (particularly the COVID-19 pandemic, given this is a new virus) are not likely to be covered.
All in all, a tenant can be left in a very tricky situation and should contact its landlord. Landlords too are faced with equally difficult decisions. Tenants and landlords should act reasonably given the unusual circumstances to achieve a mutually suitable outcome.
We note that it is not all doom and gloom for all tenants, as there are certainly some industries that have experienced a huge increase in demand – notably, toilet paper manufacturers/retailers, but we also imagine supermarkets and pharmacies. Tenants should not use the COVID-19 pandemic as an opportunity to demand rent abatements from their landlords, if they are still able to meet their lease obligations despite the crisis.
We can help you engage with your landlord/tenant and negotiate a commercially suitable outcome. We can review your lease, consider your particular situation and provide you with customised advice on the best way to proceed. We can also ensure that any agreement you reach is properly documented and will be legally enforceable if issues do arise down the track.
Authors: Kristie Carlile and Julia Yassa
Contributing partner: Melissa Potter
Rent Negotiation Legal Service
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