How does the Coronavirus (COVID-19) affect Retail Leases?

With the rapid outbreak of Coronavirus (COVID-19) and the recent announcements in New South Wales and Victoria of lockdown, landlords and tenants are questioning how the virus will affect them. In particular, tenants under commercial or retail leases are questioning the viability of their businesses under the current environment and their options for terminating their lease.

What happens if the tenant decides to stop trading?

In the absence of a force majeure provision, frustration, or vitiating factors, a tenant will generally not be entitled to stop making rental payments purely because they have been forced to stop trading. In fact, many leases require a tenant to remain open during ordinary business hours. Accordingly, the tenant would need to make the decision to stop trading in the knowledge that they will still generally be liable for rental and other payments due under the lease.

Can a tenant terminate a lease under “force majeure”?

Generally, force majeure clauses provide a party with a right not to perform its contractual obligations if that performance is impacted by events outside its control, such as war or a natural disaster. Under the current climate, a force majeure clause may provide the best remedy for a party wishing to avoid a lease.

The term force majeure does not have a standard meaning, and it is important that the clause is carefully examined to determine what constitutes a “force majeure event” and the rights conferred on the parties in the event that there is such an event.

The term may be defined broadly to include events:

• that are not the fault of any party and are not able to be overcome by reasonable endeavours; and/or
• caused by an act of God (which may include epidemics or quarantines).

The term may also be defined in the agreement to include other specific events. However, if there is no definition of what constitutes a “force majeure event”, there is a risk that the clause will be determined void for uncertainty.

Ultimately, whether a tenant is entitled to terminate the lease under any force majeure provisions will depend on how the clause was drafted. Otherwise, this will generally rely on the common law understanding of force majeure.

In Victoria, the standard lease terms do not include a force majeure clause as a standard provision, so it will be a rare tenant that has one.

Frustration of lease

Generally, frustration occurs where a tenant can point to an event which makes further performance of its obligations fundamentally different from the situation it contracted for.^[1]

The circumstances in which the doctrine of frustration can apply to leases are exceedingly rare, and the following factors are relevant:

• duration of the lease – the longer it is, the harder it is to frustrate;
• how important the lease is to the tenant’s business – the more important, the more likely frustration becomes possible;
• the duration of the frustrating event – the longer it is, the more likely frustration is an option;
• an event outside the power and control of the parties which renders the use of the property during the leased period unlawful or impossible – that is, a contractual obligation becomes incapable of being performed because the circumstances in which performance is called for would render it radically different from that which was undertaken by the contract (Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 at [70] per Nettle JA).

What if my landlord closes a whole building or shopping centre?

A landlord under a lease is required to provide a tenant with quiet enjoyment, and the consequence of a closure by a landlord will vary from lease to lease.^[2]

Leases will often contain a requirement that the tenant comply with all laws. The right to close a shopping centre will largely depend on whether a shutdown is Government mandated as opposed to a directive or recommendation only. Generally, a contract cannot require a party to act unlawfully. Therefore, keeping a building open in the face of laws that say the landlord must not, is not a term of a contract that will be enforceable.

However, it is common for leases to include provisions, or have such provisions implied, that a tenant is entitled to rent reductions and to be excused from other payments due and payable under the lease if the tenant cannot reasonably access or use the premises.

Can a tenant receive compensation if the premises cannot be accessed?

Finally, the landlord may be liable to pay the tenant reasonable compensation for loss and damage in certain circumstances if the tenant is unable to access the premises as a result of actions taken by the landlord, including:^[3]

• the landlord substantially inhibiting the tenant’s access to the retail premises; or
• the landlord unreasonably taking action that substantially inhibits or alters the flow of customers to the retail premises.

However, these provisions do not apply to action taken by a landlord as:

• a reasonable response to an emergency;
• under an Act; or
• resulting from a requirement imposed by a body acting under the authority of an Act.

Given this, it is important that parties are aware of government guidelines, directives and laws.

How can DSA Law help?

If you are a landlord or tenant and have an issue or question relating to how your rights or liabilities under the lease are affected by the Coronavirus (COVID-19), please Contact Us or one of the Commercial Lawyers at DSA Law on (03) 8595 9580 so we can assist you with your concerns.

^[1] Davis Contractors Ltd v Fareham Urban DC [1956] UKHL 3.
^[2] Hawkesbury Nominees v Battik [2000] FCA 185.
^[3] Retail Leases Act 2003 (Vic) s 54.