Article by Jane Wolfe and Iain Rennie
COVID-19 is now causing many businesses to downsize their staff and in some cases to close their doors during this critical phase of the pandemic. Many small to medium businesses, in particular retail, food and hospitality businesses, are facing survival issues in weathering the coronavirus storm.
What is the Government doing to help tenants?
Whilst the issue is on the radar of the National Cabinet, and some form of response is likely, none has yet been issued. Unfortunately, it appears that any response may differ from state-to-state.
Over the weekend the Prime Minister said “Further work will be done on identifying how relief can be provided for tenants in both commercial and residential tenancies to ensure that in hardship conditions, there will be relief that will be made available and ensuring that tenancy legislation is protecting those tenants over the next six months at least”.
“That work will be done by states and territories, as it is a state and territory matter, and that work will be led by Western Australia, together with New South Wales, working with all the other states and territories, to bring back some model rules that can be applied in hardship cases.”
Until we get a government response, what should a tenant do?
Here are some Q&As for these uncertain times:
Q: Can I claim a rent ‘holiday’ for the time that my business is affected by the pandemic, or stop the landlord from terminating the lease and locking me out of my premises?
A: Most leases will require the tenant to pay rent, outgoings and any other money due under the lease, regardless of any external conditions or situation (including a pandemic or similar event). In those circumstances, we recommend that you engage in direct and up-front communication with your landlord to try to negotiate a full or partial abatement (reduced amount) of all payment obligations for the period of the pandemic. With luck, your business has an understanding landlord with whom you have a good ongoing commercial relationship, and they will be open to such discussions and (hopefully) temporary alternative arrangements. It is important to remember, however, that small landlords will be facing similar difficulties (for example, they may rely on rental income to fulfil their own obligations under a mortgage of the relevant property) and any concessions to their tenants may rely upon them being the recipients of similar concessions from their mortgagee.
Q: My lease states that I am required to keep the premises open during set trading hours and also that they must not remain unoccupied for more than a set period of time. How can I fulfil these obligations where social distancing measures are in place and/or I am forced by the current circumstances to temporarily close my business
A: Again, these types of lease obligations will normally apply regardless of any external circumstances and, again, this will be something on which you will need to engage openly and directly with your landlord.
Q: Do I wait to hear from the landlord, or do I start the process?
A: It is important that you are proactive and start the process. As noted above, your lease will almost certainly require you to pay rent, outgoings and any other money to the landlord regardless of any external conditions and will also provide that a failure to do so gives the landlord the right to terminate. You need to commence discussions with your landlord as soon as possible, and before any non-payment or other breach sours the relationship between you or, worse, leads to termination. Open, honest and bona fide discussions with the landlord are imperative so that each of you understands the challenges faced by the other, and you can together work out a mutually agreeable approach that takes the needs of both parties into consideration.
Q: My landlord is supportive to my approach but is not clearly committing to a variation of my lease terms/rent holiday or abatement/other concession. What do I need to get from my landlord to protect myself?
A: You need your landlord’s commitment in writing to anything that has been agreed between you. This can be as simple as correspondence between you and the landlord confirming the new arrangement(s), or may be more formally attended to by a written variation of lease, signed by both parties. If your lease is registered on the title to the property, a formal variation of lease may be registered to officially record the variation.
Q: Should I prepare any documents required and send them to the landlord
A: Generally, the landlord will prepare any lease documents, including variations and the like, however, there is nothing to prevent you from offering to do this during your initial discussions. This is something which can be decided between you and the landlord prior to formal documentation of your new arrangement.
Q: My lease is technical and difficult to read. Do ‘force majeure’ or ‘frustration’ apply? How do I know if my lease deals with such issues?
A: In many types of contract, the parties may have rights arising when ‘force majeure’ or ‘Act of God’ events occur, or where a contract is deemed to have been ‘frustrated’. Unfortunately, lease contracts do not usually provide any rights to tenants arising out of force majeure/act of God events, and nor do they readily lend themselves to the concept of frustration. To determine whether you have any rights in this respect, we would recommend legal review of your lease, as to which see further below.
Q: My business is unaffected so far, but I need to protect it. How do I pre-empt any difficulty my business may face with meeting its lease obligations in the future?
A: The uncertain nature of the pandemic means that it is impossible for anyone to predict its duration. If you are not facing difficulties now, but think that you may in the future, you should closely monitor how your business is performing. As soon as you foresee the possibility of any upcoming difficulty with meeting any of your lease obligations, you should initiate an open discussion with your landlord per the above.
What to do if your landlord is unreasonable
Our answers anticipate that your landlord is reasonable and supportive in getting your business through the COVID-19 pandemic. There will be some landlords who do not take a reasonable approach or who have financial issues of their own arising out of the pandemic. Such landlords may insist that all lease obligations remain on-foot, and that you must continue to pay rent and other money in full and/or continue to operate, under threat of them stepping in and terminating your lease.
In those circumstances, we suggest that you promptly get legal advice as to any rights you may have.
This Q&A is intended to help you understand your options and decide what is right for your business. Please get in touch if you have specific questions or need legal advice on the issues facing your business during COVID-19 by calling Australian Business Lawyers & Advisors on 1300 565 846 or email email@example.com.