COVID-19 effect on Landlords and Tenants and Force Majeure

With the evolving global impact of COVID-19, many business clients and landlords have expressed concerns regarding existing obligations under their commercial and retail lease agreements. Common questions and issues that are arising are:

• Is COVID-19 a Force Majeure event?
• Does the inability to comply because of COVID-19 mean that the contract may be terminated on the basis of frustration?
• How does COVID-19 affect a commercial lease as relating to abandonment or vacation of a leased space?
• How are common areas affected as a result of social distancing requirements?
• What insurances may be available to the landlord?

The below has been provided for your information and is not to be relied upon as legal advice. Advice may differ depending on the particular terms of your lease agreement. If you wish to discuss your commercial lease matters or specific concerns please do not hesitate to contact our office on 9832 0608 or email us on info@lgmadvisors.com.au to get in contact with one of our commercial lawyers.

Is COVID-19 a Force Majeure event?

Force Majeure clauses generally protect a party from events such as acts of God and natural disasters, riots, war, labour strikes and embargoes which result in the party not being able to comply with its obligations. Force Majeure clauses are not common in Australian lease agreements. However, in appropriate circumstances, where a lease agreement does include such a clause, a tenant may seek to exit the lease or request for a rent reduction, as the case may be. The drafting and wording of the Force Majeure clause would have to be carefully considered to understand what options are available and whether a pandemic, epidemic or widespread impacts from a communicable disease is included. If the clause does not strictly restrict the categories of events, such an event may well be included even if the clause does not specifically refer to it. Landlords and tenants ought to review the terms of their leases carefully to determine whether a Force Majeure clause has been included and, if so, whether a pandemic such as COVID-19 would be covered under the relevant provisions of the lease.

Will inability to comply because of COVID-19 mean that the contract may be terminated on the basis of frustration?

Where no Force Majeure clause has been included in a commercial lease, tenants may look to other options to exit their lease obligations. While difficult to establish, contracts, which includes commercial leases, may be subject to frustration. A party may seek to avoid their obligations under the contract or commercial lease if it has become impossible to perform. Frustration of a contract was defined by Lord Simon of Glaisdale in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 as follows:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

Where the option to get out of the lease is not available on legal principle, tenants may instead approach landlords to negotiate rental abatements or a surrender of their lease, which would likely be at a premium to the landlord. Any such arrangements, however, would be subject to further negotiation and agreement between the parties.

How does COVID-19 affect a commercial lease as relating to abandonment or vacation of a leased space?

Commercial leases will often contain a clause preventing tenants from abandoning or vacating the premises without the landlord’s written consent for prolonged periods. A common time frame is 14 days. Many tenants are requiring staff to work remotely due to the coronavirus. It is important that tenants and landlords communicate early on this issue. If a tenant vacates a premises due to restrictions imposed by the government relating to COVID-19, the landlord will have no way of knowing whether the abandonment is for a short period of time or whether this will continue into the future. In the circumstances, tenants should carefully consider the clauses in their lease agreements to understand implications on vacating the premises, for how long they may vacate without the landlord’s consent if they are able to do so, and to contact the landlord in appropriate circumstances to ensure that they are not in breach of their lease agreement. Any changes to the lease agreement should be properly codified if the tenant and landlord agree for extended periods of absence from the premises due to the coronavirus and government requirements.

How are common areas affected as a result of social distancing requirements?

The landlord may be required to enact policies to comply with government directives on social distancing such as how many people are allowed to gather at a time inside an enclosed space. This could impact the way that common areas are used or allowed to be used in a premises. This may affect work facilities, breakrooms, conference rooms and in the case of retail properties, food courts and other spaces. Most leases give landlords extensive rights as to control over common areas provided that the landlord does not interfere with the tenant’s use and occupation of the leased premises. However, ultimately what the landlord can and cannot do will be governed by the terms of the lease and the specific circumstances relating to the premises should be considered.

What insurances may be available to the landlord?

Many landlords rely on income from tenants and in times of hardship it is worthwhile reviewing insurances that had been taken to cover loss of rent and consequential loss. It is important to check what insurances had been taken out and what coverage is afforded to the landlord in appropriate circumstances.

LGM Advisors is a leading commercial litigation Melbourne professional law firm, the experts to contact when you require  commercial lawyers and employment lawyers. LGM Advisors have the skills, experience and expertise to ensure that you and your dispute is consulted upon with the utmost professionalism. Contact LGM Advisors today on (03) 9832 0608 or by email at marketing@lgmadvisors.com.au.

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