The sudden disruption of infectious disease COVID-19 to business has led to increasing enquiries from Landlords and Tenants about how to deal with their Lease obligations. We are advising our Landlords and Tenants to review their Lease obligations and attempt to negotiate their way through these unprecedented times.
We have developed a checklist for both Landlords and Tenants to consider as follows:
- Check your Lease for rent abatement clauses.
Commercial and retail leases commonly contain a clause allowing a reduction in rent if a tenant cannot reasonably access or use the premises. In most cases, the rent abatement clause will only apply where there is damage and destruction of the premises however we recommend that these provisions be carefully examined to determine the scope and applicability in the COVID-19 scenario (particularly where a Landlord is considering closure of a building).
- Check your Lease for Force Majeure Clauses.
These provisions are rare in commercial leases. They allow for the suspension or termination of obligations under a contract where the performance of obligations is prevented by events occurring beyond the control of the parties. In the event the Lease does contain such a provision the wording of the clause will need to be closely examined.
- Check your insurances
While health pandemics are not usually covered by insurance, it is still worthwhile carefully reviewing your insurance policies.
- Check your reporting obligations
Some Leases require Tenants to notify Landlords where there is an incidence of infectious disease. Tenants should ensure they are complying with their obligations in this regard and Landlords should be monitoring the Tenant’s compliance.
- Check your health and safety obligations
Landlords may also be required in their Leases to meet health and safety obligations and any failure to comply could result in an action being taken by the Tenant against the Landlord for breach.
- Consider what security you have received/given
In order to understand the potential effect of a breach or termination of the Lease, we recommend that Landlords and Tenants check what security has been provided (i.e. bank guarantees, personal guarantees and cash security deposits). Access to/use of the security deposit will depend upon the circumstances.
What should you do – negotiating rent relief?
Where tenancies involve the retail, tourism and hospitality sectors (amongst others), Tenants are likely to be facing devastating losses. Landlords should monitor the financial health of their existing tenants and attempt to mitigate against dropping investment returns.
It is important for Landlords to consider the long-term effects on their investment and whether providing rent relief to their affected Tenants now (particularly good Tenants) will place them in a better position once the COVID-19 crisis is over. At this stage we are suggesting to Landlords not to make long term promises until it is understood what Government relief may be available to Tenants.
Tenants who are unable to meet their Lease obligations should urgently contact their Landlords to discuss rent relief. While Landlords are not obliged to provide rent relief (unless the Lease specifically provides for it), it is advisable to discuss rent reduction, abatement or suspension, (noting that suspension means the rent is still to be paid back at a future date). It may also be possible (by agreement) to utilise any security deposits in the short term.
Overall, any agreements reached around rent relief should be correctly documented to avoid future disputes.
The Prime Minister has announced that the States are working on identifying “how relief can be provided for tenants in both commercial tenancies and residential tenancies to ensure that in hardship conditions there will be relief that will be available and ensuring the tenancy legislation is protecting those tenants over the next six months at least”.
We understand that the NSW government have amended their retail leasing legislation with a view to prevent Landlords evicting Tenants and the ABC have reported that the Tasmanian Government is considering legislation which would prevent Landlords from terminating for non-payment of rent for a period of 120 days. We understand that the Victorian Government are currently considering similar changes to legislation.
If you would like us to assist by giving your Lease a “COVID-19 Health Check” or have any queries, please do not hesitate to contact us. We will keep you updated on Government announcements and any proposed changes to legislation as they come to hand.