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Australia – Retail & Commercial Property Tenants: What to do if COVID-19 has closed your premises

The ongoing coronavirus pandemic continues to have severe and worsening impacts on Australian businesses. With newly announced government restrictions forcing many businesses to close indefinitely, there will be many business owners in the position of now holding a lease for premises which they are no longer able to open for trade or even access. These tenants are now facing sustained uncertainty as to when they can reopen, and many will find it hard to continue paying rent on premises when their own source of income has disappeared.

In today’s post, we will discuss some of the key legal concerns facing tenants of retail & commercial leases, along with offering some practical solutions. Given the rapidly evolving situation, and with many states passing emergency state legislation in response, it is essential that leaseholders facing issues ensure be proactive and get prompt legal advice.

What will be the impacts of government-ordered closures on my rights as a tenant?

The government is regularly updating and elevating its response to the coronavirus pandemic. Federal and State governments have broad statutory powers allowing them to control access to certain places of gatherings and restrict movement of people. If premises are the subject of a statutory evacuation order and/or an ongoing restriction of movement order, then both the landlord and tenant have an obligation to comply with that order.

While the situation is evolving and we are in unchartered territory, it is very unlikely that either party to a lease could be considered to be in breach of its respective obligations by the act of complying with a statutory order of closure or evacuation. This means generally the following:

  • The lease will not be considered to be frustrated;
  • No breach by the landlord for failing to allow the tenant the benefit of quiet enjoyment;
  • No breach by the tenant due to failing to continue trading;
  • No breach by the landlord for not operating the centre and not providing essential services; and
  • The tenant will not have a claim for compensation under retail legislation, given that compliance with statutory orders falls within the emergency provisions of state legislation.

Will rent abatement clauses apply?

Rent abatement is a provision commonly included in leases, entitling tenants to temporarily withhold rent (in whole or a portion) until a landlord completes property repairs, in the event that the premises become uninhabitable.

While the wording of these clauses varies depending each contract, we think it is unlikely that this clause will apply in instances relating to forced closure of commercial centres or premises. This is because the premises cannot be considered either damaged or destroyed, which is essential to these kinds of clauses.

Does “force majeure” apply?

You have probably already heard mention about the impact of force majeure on contracts. But because there is no general common law doctrine of force majeure, for force majeure to operate relevant clauses must be included in the contract. Clauses relating to force majeure, however, are normally not included in leases. Tenants should have a lawyer review their contract, however, it is unlikely that they will be able to rely on a specific “force majeure” clause.

Can I get out of the lease by showing that the lease is frustrated?

For the moment, our general view is no. A contract is frustrated when an event gets in the way, at no fault of either party, of completing the contract, to such an extent that performance of the contract becomes either impossible or radically changed. A short-term closure of the premises due to a statutory order by a government does not meet the high bar to prove that the contract has been frustrated.

This being said, we still have no idea how long centres will remain closed, or how long the coronavirus emergency will last. At this stage, it is certainly not impossible that centres will be closed for several months. As time progresses, the chances that leases will become frustrated due to this type of closure does increase, but this would need to be properly assessed by lawyers at the right time.

The law is limited… so what are my practical options?

Basically, the laws and regulations of a pre-coronavirus world will offer limited protection or relief for tenants. The world has changed so much in the last few weeks that the law can’t keep up. It is expected that additional relief packages will be announced in the coming days, along with state legislation in various jurisdictions. It is critical that both tenants and landlords are keeping up to date with the evolving situation and laws.

With this in mind, this is certainly not to say that a tenant has no options if they are struggling to pay rent. Instead, we would argue that because the impact of coronavirus are being felt so widely and deeply, the normal rules of the game no longer apply, and instead both parties need to rely on mediation and dialogue to resolve disputes and issues in these complicated times.

Our property and commercial lawyers have already been asked to assist in negotiating issues arising relating to coronavirus. Some of the key points to remember include:

  • Firstly, if you are in the position that you can’t pay rent, you need to ask yourself what you want to achieve. Do you want to get a discount in rent, get more time to pay, or walk away entirely?
  • “Dust off” your lease and have your solicitor review so that you know where you stand in terms of what was initially agreed.
  • Make a plan and have a strategy in place that works for you.
  • Be extremely careful with communications with your landlord or their agent. You may be lucky enough to have a good relationship with your landlord or their agent, but there is a critical need to not make any damaging representations to them and to keep your options open.
  • This is why it is a good idea to have a solicitor speak to them on your behalf and open up a discussion. Solicitors have legal privileges meaning they can talk on a “without prejudice” basis. This generally means that statements made in a genuine attempt to settle a dispute can’t be later used against them as evidence in court.
  • Formalise any agreed variations in writing.
  • Avoid escalating disputes and always keep the negotiation door open.

Landlords will more than likely be happy to listen to tenants’ concerns. We have already seen cases of landlords being proactive with offering discounts on commercial leases – keep in mind that they too want to come out of this on the other side, and will prefer having a tenant paying reduced rent to someone walking away from a lease altogether, as this would leave them with no rent for an indefinite amount of time. Tenants and landlords need to understand the commercial reality of the current situation. By planning well and negotiating early, along with taking full advantage of the various stimulus packages, businesses will be able to give themselves the best chance to survive. At the end of the day, we are all in this together and the virus will evetually pass.

Harris Gomez Group is an Australian law firm with 25 years experience based in Sydney, with sister offices in Santiago and Bogotá. We specialise in business and corporations law, technology law, and cross-border issues. We assist small to medium-sized Australian businesses with a variety of issues, including employment law, property law issues (such as rental contracts) and contract disputes.

If you are facing issues with your commercial lease due to the impacts of the coronavirus, we encourage you to contact Harris Gomez at hmg@hgomezgroup.com

Our Sydney office is located at Level 7, 92 Pitt Street, Sydney NSW 2000.