COVID-19 – Impacts for Commercial Leases & Commercial Contracts
Commercial Leases
The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (the Regulation) commenced on 24 April 2020. The purpose of this Regulation is to give effect to the National Cabinet Mandatory Code of Conduct for Commercial Leases (the Code) which was announced by the National Cabinet on 7 April 2020.
Key aspects of the Regulation include:
- the Regulation applies to both retail leases and commercial leases
- to qualify for relief, the tenant must be an “impacted lessee” – that is, they qualify for the JobKeeper program and have turnover of less than $50 million for the 2018-2019 financial year
- a landlord cannot take any of the “prescribed actions” against an impacted lessee (such as evicting the tenant, terminating the lease, re-entering the premises, or calling on a security bond or guarantee given by the tenant) due to non-payment of rent or outgoings during the “prescribed period” (ie, 6 months after the commencement date of the Regulation which is 24 April 2020)
- the rent payable by an impacted lessee must not be increased during the prescribed period (other than rent determined by reference to turnover)
- a lessee will not be in breach of a lease due to an act or omission which is required under a Commonwealth or State law in response to the COVID-19 pandemic (such as shutting their business due to a COVID-19 order)
- if requested by an impacted lessee, the landlord must renegotiate the rent payable under the lease in good faith having regard to the economic impacts of the COVID-19 pandemic and the leasing principles set out in the Code
- the leasing principles in the Code include:
- in any negotiations landlords must offer proportionate rent reductions (up to 100% of the rent ordinarily payable) through rent deferrals or waivers based on the reduction in the tenant’s trade during the COVID-19 period
- waivers must be no less than 50% of the total rent reduction, and may constitute a greater proportion in the circumstances – although regard must be had to the financial capacity of the landlord to provide additional waivers above 50%
- any deferred rent must be repaid over the balance of the lease term or 24 months (whichever is greater)
- any reduction in outgoings must be passed on to the tenant
- landlords cannot levy any interest or charges in relation to the rent deferrals or waivers
- tenants must otherwise comply with the terms of the lease (as amended)
- the landlord and tenant may agree to waive some or all of the requirements of the Regulation and Code
- the landlord cannot take any action (such as seeking to recover possession of the premises, terminating the lease or exercising or enforcing its rights under the lease through legal proceedings) unless and until the parties have attempted mediation
- any court or tribunal hearing a dispute over these matters must have regard to the leasing principles set out in the Code
- a landlord may still take a “prescribed action” (such as terminating a lease) in circumstances unrelated to the economic impacts of the COVID-19 pandemic (such as where the lessee damages the premises or refuses to vacate the premises upon expiry of the lease)
Key Takeaway
Landlords should consider what financial information it is reasonable to expect a tenant to provide in support of any request for rental reduction or waiver and tenants should compile relevant information urgently if they are entering into negotiations with their landlord. It may be, for example, that a tenant’s turnover is more severely impacted than is required to qualify for the JobKeeper program. In those circumstances it would be expected that a tenant would provide detailed financial information in support.
Commercial Contracts
If you are seeking to terminate a contract or alternatively to enforce it, force majeure and frustration are relevant.
- for force majeure to operate there must be an express clause in the contract, whereas frustration does not require an express term to give it effect
- both concepts apply to similar situations – a supervening event occurs which prevents or delays performance of the contract through no fault of the parties and in circumstances outside of their control
- a force majeure clause will usually contain an exhaustive list of defined events, often including “acts or restraints of government authorities”
- frustration requires the circumstances to be “radically different” from those contemplated when the parties entered into the contract
- the consequences of force majeure and frustration differ – force majeure usually allows the parties to suspend performance and terminate the contract (without penalty) if the force majeure event continues for a certain period of time, whereas upon frustration occurring the contract comes to an end and the parties are discharged from further performance
Key Takeaway
It is vital that you seek legal advice before varying or terminating a contract or lease or walking away from your obligations under a contract or lease at any time and particularly if your business is affected by the Covid-19 crisis. Unlawful termination could amount to repudiation and may expose you to damages.
More Information
Please contact our commercial law team at Matthews Folbigg Lawyers on 9635 7966 if you would like advice or assistance in respect of your rights and obligations arising from Covid-19 or any other matter relating to your business. You can also contact us at info@matthewsfolbigg.com.au.
DISCLAIMER: This article is provided to readers for their general information and on a complimentary basis. It contains a brief summary only and should not be relied upon or used as a definitive or complete statement of the relevant law. Liability limited by a scheme approved under Professional Standards Legislation.
