Australia | Publication | March 2020
Your obligations, whether as landlord or tenant, in response to the COVID-19 crisis, are set out in your lease.
REMEMBER: Each lease is different so it is important that you carefully read the terms of your lease to work out exactly what your obligations are. If you are in doubt, we recommend that you seek specific legal advice.1
As a tenant, you are generally obliged to:
If you fail to comply with any provisions of the lease you could be in breach, giving the landlord the right in some cases to terminate the lease and claim damages (compensation for losses).
Depending on what your lease says, and subject to the directions of the government which continue to be updated daily, you generally will not be allowed to stop trading and close a retail business in the event of an outbreak of COVID-19.
This might be different for commercial businesses which can adopt agile working practices. Provided you continue to pay rent and other payments under the lease, it is unlikely your landlord will have an issue.
If you want to close your premises but your lease requires you to stay open, then you may wish to discuss the matter with your landlord.
Leases generally only give you the right to stop or reduce the amount of rent and outgoings you are paying if you cannot access or use your premises because they are damaged or destroyed.
Unfortunately, it is highly unlikely you will be able to claim a suspension or reduction in rent and outgoings during any closure period if the choice is your own.
If you do not pay rent, your landlord may have the right to terminate your lease and evict you from the property – this is likely to be the case regardless of whether the landlord has been forced to close the premises following a direction from the government.
You should review your insurance policies to see if business interruption insurance will apply to a pandemic situation like COVID-19.
If your tenants fail to pay rent or other outgoings as required under their lease, you might be able to call on bank guarantees or cash deposits (if any) provided under the lease . You should check whether any bank guarantees or cash bonds you hold are up to date and review the terms of the lease to confirm what the requirements are for you to call on those securities.
Most leases contain a clause in the tenant’s favour allowing a tenant a reduction in rent and other payments if a tenant cannot reasonably access or use the premises. However, these clauses are typically linked to specified damage making the building inaccessible or unfit for occupation, which is a stretch from the building simply being closed/locked due to threat of disease. Some leases also have a right to rent reduction or early termination if “hazardous materials” are in the premises (if the definition of “hazardous material” could cover COVID-19).
Closing a retail shopping centre will be different - retail legislation in the relevant State might provide a tenant with rent relief or other protections, depending on the extent to which the landlord has acted reasonably in deciding to close the centre (or parts of the centre), and whether the closure or restricted access is due to a lawful direction or requirement of a government authority.
In either case, the tenant might have a right to claim against the landlord for breach of the right of quiet enjoyment.
In some circumstances, the lease might contain terms allowing the tenant to terminate the lease early for a “force majeure” event i.e. unexpected circumstances outside of a party’s reasonable control that prevent it from performing its contractual obligations. Whether a tenant can terminate a lease for a “force majeure” event will depend on the wording of the clause in each case.
If a lease becomes impossible to perform because of COVID-19, the tenant may seek to argue that the lease has been frustrated and should be brought to an end.2
Depending on what your lease says, you might need to comply with the directions of any relevant authorities including government directions (to introduce additional health and safety procedures or close the premises). Because COVID-19 is a health and safety risk, you will also have obligations as a landlord to work with your tenants and other parties who are in the premises (maintenance workers etc.) and have open communication about any suspected or confirmed cases, and steps you have taken or others can take to prevent the spread.
Neither the landlord nor the tenant wins where the landlord is forced to evict the tenant. While both sides can refuse to negotiate the terms of an existing lease, it might be worthwhile for the parties to discuss temporary changes to account for the ongoing uncertainty around COVID-19 - increases in cleaning services provided; a rent reduction; suspension of the payment of outgoings3; changes to the mandated opening hours; or a surrender of the lease.
Given the daily developments of COVID-19 in Australia, whether you are a landlord or a tenant, you should:
This guide should be read subject to any direction of the government ordering businesses to close generally, an order of a relevant authority which affects your premises specifically, or a temporary closure required to comply with your work health and safety obligations where your premises are the potential source of an infection. If you have any questions about your obligations in these cases, we recommend you seek legal advice.
Given the potential for costly and time consuming litigation and a large damages claim for wrongful termination of a lease, we strongly recommend that you obtain legal advice before you consider terminating your lease or stop performing your obligations under it.
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