A large proportion of commercial tenants have suffered a dramatic decline in custom and revenue as a result of government restrictions on store openings, unilateral closures of stores and offices and the downturn of custom resulting from lockdowns.
Tenants are increasingly requesting suspensions or reductions of rental payments or simply failing or refusing to pay rent. This is expected to exacerbate in successive months while the current restrictions remain in place and quite rapidly in the immediate aftermath of the well anticipated release of the framework provided by the National Cabinet Mandatory code of conduct for small and medium commercial tenants.
Arguments being raised for tenants to support rent relief include: force majeure (disruption caused by a wide-scale event out of the control of the parties), frustration of contract (the failure of the underlying purpose of a contract), rent abatement, lessor representations regarding visitor traffic, anticipation of the Federal Government Guidelines and of course commercial considerations. Tenants and their agents and even advisors should be mindful that force majeure, and rent abatement arguments would be dependent on express clauses in the lease and that such provisions are not the norm and even where present are often too narrow to support rent relief in the current turmoil. Frustration of contract is a principle of law that does not depend on a contractual term for support however frustration is a high threshold particularly in the case of leases that ordinarily entails a substantial failure of the underlying object of a contract not a mere interruption. which in practice have been very rare for many years). Lessor representations regarding visitor traffic are not considered common in practice and would typically require fairly cogent evidence.
The force of these arguments would therefor variously depend on the precise lease terms (which typically are not encouraging for force majeure or rent abatement arguments), the expired & un-expired term of the lease, the permitted and actual use of the premises, the degree and precise cause of the downturn in tenant’s trade and revenue, legislation, case-law and commercial considerations such as the desirability of supporting a ‘good’ tenant to ride through a temporary storm at a time when most likely there isn’t a better option. The perceived reliability of a tenant and the absence of any conflict or difficulties in the past will of course be material in this regard.
Practical considerations also are of significance including that the caronavirus has at once somewhat reduced the capacity of the courts and tribunals to hear disputes and likely imbued a greater degree of sympathy towards those whose livelihoods are being undermined through no fault of their own. In any event, dialogue between landlords and tenants in search of a deal to enable tenants to get through the current turmoil, perhaps with some measure of upside for the lessor later, is preferable to an escalating legal dispute however lessors with loss-of-rent insurance should be mindful that rent relief concessions granted in favour of tenants are likely to be rejected as insured or recoverable loss in a similar vein that lessors have considered tenants who suspended trading when not ordered to do so were acting voluntarily.
We consider that many of the discussions between tenants and lessors are lacking in rigour. Legal terms like abatement are being brandished almost reflexively and lessors’ do not seem to be seeking the precise information and documents from tenants that would truly inform a fair and balanced outcome to the current upheaval which is indiscriminately affecting lessors, tenants and government. We recommend that any agreements entered between tenants and lessors be entered into for an interim period as circumstances and the law are changing rapidly. Consideration should also be given to including some provision or mechanism to render the terms of any agreement subject to changes in the law. Lessors with landlord Insurance should consider that any rental concessions agreed to may void landlord insurance or loss of rental coverage.
The release of the National Cabinet Mandatory code of conduct on 7 April 2020 is likely to significantly alter the balance of such negotiations in favour of tenants in some regards. This does not yet have the force of law – although NSW and Tasmania have each taken the first step in enacting legislation to enable regulations or ministerial notice curtailing the rights of lessors to be made – however is to be given legal force by the States shortly and so is already beginning to inform the bargaining power between lessors and lessees. The first of the ‘Leasing Principles’ provides that ‘Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).”
For tenants with annual turnover reduced by at least a 30% and below $50 million dollars and in receipt of a JobKeeper wage subsidy, landlords are required to provide rent relief in the form of rent deferral and rent waiver with the proportion of the relief in the form of waiver to be (at least) one half of the percentage that the revenue of the tenant has fallen.
For a low fixed price of $440 including GST, Leasepro Legal will review your lease, provide you a fixed list of questions, review your answers and provide a preliminary letter of advice taking into account the various considerations outlined above.
For lessors with loss-of-rent insurance, for an additional $110 including GST, we will additionally review your policy and include preliminary advice regarding your entitlement to insurance coverage resulting from tenant’s failure or refusal to pay rent due to Covid-19.
The Hon. Scott Morrison MP, Prime Minister in a National Cabinet Statement on 29 March 2020 said, “State and territories will be moving to put a moratorium on evictions of persons as a result of financial distress if they are unable to meet their commitments.” and “ National Cabinet agreed to a moratorium on evictions over the next six months for commercial and residential tenancies in financial distress who are unable to meet their commitments die to the impact of coronavirus.”
The National Cabinet Statement in does not yet have the force of law in relation to residential leases with the exceptions that NSW and Tasmania have respectively enacted legislation to enable regulations or ministerial notice curtailing the rights of lessors and on 2 April, Tasmania’s Premier issued a declaration prohibiting termination of residential leases subject to some narrow exceptions1. Additional State legislation and regulations are expected in due course.
Accordingly the National Cabinet Statement is presently guiding but not binding however the anticipated State regulations can strongly be expected to have retroactive force when introduced so it would take an adventurous lessor to currently seek to evict a residential tenant however lessors can of course require reasonable disclosure and documents from any tenants failing or refusing to pay rental on the grounds of financial distress due to the impact of coronavirus.
Although arguments of force majeure (disruption caused by a wide-scale event out of the control of the parties) or rent abatement are being suggested in several quarters, the applicability of these would require a suitable provision in the lease which in the case of residential leases is very unlikely.
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