Commercial leasing amidst coronavirus

Commercial Directions

In these uncertain times, many commercial landlords and tenants are contemplating the possibility of closing premises either temporarily or permanently.

There are multiple scenarios being contemplated by federal and state governments which continue to develop. Further, the Australian Government announced on Monday (30 March 2020) that there will be a moratorium in evictions under commercial and residential leases for at least six months; however, the breadth of its applicability and exact details have not been announced.

This is in many respects unchartered legal territory. Nonetheless, there are some guiding principles.

While the starting position is that rent would usually continue to be payable even if there is a disruption to the business (some leases have provisions which will specifically deal with this) it will depend on the circumstances.

There are various issues that landlords and tenants should consider as follows.

Closure of premises by tenant

Most leases contain a requirement for the tenant to keep the premises open for trade and a failure to do so is a breach of the lease. If a tenant were to unilaterally shut their premises (while continuing to otherwise observe their obligations), this could still be a breach of the lease

One option which landlords might consider would be seeking a court or tribunal order for specific performance (or that the tenant stay open). The case law suggests that courts are reluctant to force a tenant to open for business as this would require a level of ongoing supervision to which courts are averse. The landlord would likely need to seek other remedies, if applicable.

It seems unlikely that a court or tribunal would assist a landlord who defaults a tenant for shutting their premises in the face of a health risk. Further, taking a commercial perspective, a landlord’s interests may be better served by facilitating a closure in order to protect the long term viability of the tenancy.

Closure of building by landlord

Landlords would need to consider, before closing any building without an order from the government, whether doing so would be a breach of the tenant’s right to exclusive possession and quiet enjoyment. This could give rise to an argument from the tenant that the landlord has repudiated the lease, giving the tenant a right to terminate.

Many leases provide rights for a landlord to close premises in the event of an emergency – however, the exercise of these rights depends on the wording of the relevant clause, the terms of the lease, the applicable retail legislation and any other lease provisions that may touch on this issue.

Frustration of Lease

If premises are ordered closed by the government, tenants may consider arguing that there has been a frustration of the lease giving rise to a right to terminate.

The present scenario draws some parallels with the British House of Lords decision in National Carriers Ltd v Panalpina (Northern) Ltd, which dealt with a warehouse lease where the point of access to the premises became dangerous and was closed by the local council, effectively preventing the tenant from using the premises for its intended purpose. While holding that leases could be terminated where there is a frustration, the House of Lords did not find that a frustration had occurred. The bar was therefore set quite high.

There is mixed Australian authority and there does not appear to be any High Court authority on whether a frustration can give rise to a lease termination right in Australia. However, the possibility has been discussed at various court levels in Australia. Experienced practitioners believe that where it is temporarily impossible to perform a particular covenant, that covenant may be suspended during that period.

It appears that a short term closure of premises may not reach the level required to achieve a frustration on the National Carriers thinking, but may prevent a landlord from pursuing a claim of breach for a tenant not opening.

Repudiation

There is, of course, a danger where either party acts unilaterally in a way fundamentally inconsistent with the lease that such acts could amount to a repudiation of that lease, granting the other party a right to terminate.

Retail legislation

The retail legislation throughout Australia deals further with landlord interference, with the operation of a business including preventing tenant access and altering customer access.

In Victoria for example, the Retail Leases Act 2003 (Vic) provides at section 54 that a landlord is liable to pay compensation where the landlord or someone acting on its behalf substantially inhibits the tenant’s access, customer flow or disrupts trading.

The legislation however contains a carve out for action taken by a landlord:

  • as a reasonable response to an emergency; or
  • in compliance with any duty imposed by or under an Act or resulting from a requirement imposed by a body acting under the authority of an Act.

While the above carve out may limit a landlord’s liability for damages, for example, due to loss of trade, the landlord may nevertheless be prevented from enforcing an obligation to pay rent or outgoings during such a period as a result of the prohibition against unconscionable conduct in section 77 of the Victorian Act.

While all state retail legislation contains provisions dealing with landlords causing disruption to the tenant’s access, the provisions of the retail and property legislation in each state varies. These would need to be considered on a state by state basis.

Proposed eviction moratorium

There is very limited information presently available in respect of the proposed moratorium. In the interim, the main take-away points are:

  • There will be an eviction moratorium put in place by state governments, however, the breadth of its applicability and exact details have not been announced For example, what a party needs to do to prove it isn’t paying rent due to the current issue and whether it extends to breaches other than non-payment of rent.
  • There will be some form of right to get out of leases in certain circumstances. The full details (as above) have not yet been announced. For example, whether a lease with still a long time to run can be terminated and on what grounds.
  • The Australian Government has not yet indicated that it will further interfere in commercial relationships (other than preventing evictions and letting some tenants out of leases).
  • It will therefore in many cases continue to be for landlords and tenants (and their financial institutions) to work together to find mutually beneficial solutions going forward.
  • As can be seen, the announcement has been made so far in broad terms and with little detail – which presumably will come in the coming days from the respective state governments.

The indication, however, is that the Australian Government wants to limit its intervention to more extreme scenarios and is working towards a situation where as many businesses can survive as possible while the Government leaves most of these details up to landlords and tenants to be worked out between themselves. This would see government only stepping in at when there were extreme situations such as eviction and would likely be limited to a connection with the current issue being the cause of default.

Conclusion

In these circumstances, every lease will be different, every tenant will have different issues, and every landlord will have different requirements. Parties will need to come together and negotiate how their relationship is to proceed going forward.

As mentioned by numerous commentators, it is probably not in the interests of most landlords to evict tenants where finding a new tenant in the current climate may pose its own difficulties.

Landlords and tenants should take legal advice on what rights and remedies are open to them in their particular scenario.

Further information / assistance regarding the issues raised in this article is available from the authors, Joshua Szwarcbard in our Property & Leasing team and Jonathan Markowitz in our Commercial Litigation team, or your usual contact at Moray & Agnew.

The above content is commentary rather than legal advice and was prepared on the basis of applicable legislation, government programs and initiatives that were in place as of the date of publication. Given the ongoing evolution of both the COVID-19 pandemic and frequent consequential changes to the various laws and programs within all Australian states and territories, readers should seek legal advice on the current situation as applicable to their specific circumstances before taking any action in relation to the above.


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