COVID-19 AND YOUR LEASE

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The evolving COVID-19 situation has many people on edge. The current status of the situation remains the same as set out in our article on Wednesday, being that the pandemic has been recognised as a ‘public health emergency of international concern’ by the World Health Organisation.  Governments are continuing to monitor the situation and declare various levels of state emergency.

As business owners, many of you will either own property that is currently leased (you are the landlord), or you are currently leasing property (you are the tenant).

While some businesses will be able to continue operating remotely, for others your physical location is essential to the continued operation of your business.

The changes that are being implemented by the government could trigger contractual relief from obligations for parties to a lease, but these changes could also trigger specific obligations under leases.

  1. What are your obligations?

In terms of your obligations, you should check:

  1. Any specific infectious disease and/or health and safety obligations in your lease which require you to:
  • provide notice to the other party to the lease or any authorities; or
  • take specific action, which could include closing your premises.

These obligations may be in your actual lease document, or in a related “Rules” document – this will be particularly relevant if you have a retail lease.  These obligations would be triggered if there is a government imposed lockdown, but could also be triggered if there is a health and safety issue that is required to be reported to the other party i.e. if a staff member of the tenant is infected then the tenant would be obliged to notify the landlord and other authorities and this could result in a closure of the premises depending on what the lease and related documents say, and also depending on the severity of the situation.

  1. What relief is available?

In addition to any obligations that may be triggered, there may also be long term repercussions from the COVID-19 pandemic which trigger contractual relief from your lease obligations.  Obviously, if you are a landlord this means that you need to be aware that your tenant may have a right to suspend or terminate performance of the lease (including the obligation to pay rent) if they are unable to continue to meet their obligations under the lease.

Relief considerations include:

  1. Excusable Delay/Force Majeure events

The Excusable Delay and Force Majeure events (the Delay Events) discussed in our previous article are not automatic in all commercial contracts and even if a Force Majeure clause does exist there is no guarantee it will respond in the event of COVID-19.  The drafting of the clause itself will be relevant.

Important things to consider :

  • Delay Events will only be triggered if there are specific provisions in your lease dealing with these situations.  If that is the case, then you need to familiarise yourself with the notice and other requirements associated with these Delay Events.
  • You should refer to our previous article and review the four key considerations that should be kept front of mind when reviewing your lease (or any commercial contract).
  1. Frustration of the lease

If your lease does not have a clause dealing with Delay Events there is an argument that the legal doctrine of frustration may be implied in some leases and other contracts.  Given COVID-19 is a new and unexpected event, there is no guidance as to whether the doctrine of frustration will apply.  Whether the doctrine will apply will be dependent on a number of factors such as whether the government imposes a lock down on Australia.

  1. Landlord of tenant of a retail lease

If you are the landlord or tenant of a retail lease, then the provisions of the retail legislation in the relevant jurisdiction may also be relevant.  Again, how the government elects to deal with COVID-19 will be relevant.

In the absence of a Delay Event or reliance on the doctrine of frustration, if you are a tenant and you make the decision to stop trading and close your premises then it is unlikely you will have any right to rent relief, particularly if you have a retail lease. In fact, you may be in breach of your obligations if you do this.

Obviously, you can always agree with a landlord or tenant to suspend obligations under a lease, but any agreement should be documented in writing between the parties.

  1. What should you do?

Given that the COVID-19 situation in Australia is changing daily, landlords and tenants should be reviewing their leases and making sure they take all appropriate action to comply with their obligations.

As always, the team at Osborn Law are available to discuss any questions or concerns you may have regarding these matters.  Please contact our team on (02) 4927 2900.

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