The current circumstances surrounding the global COVID-19 pandemic are impacting many aspects of our lives, and the relationship between landlord and tenant is certainly no exception. Businesses all over the country are being forced to close their doors, either due to compulsory government restrictions or due to a severe reduction in trading, with many tenants struggling or unable to meet their rental obligations.
For both landlords and tenants, it is important to know how the current circumstances may impact you and your lease.
The National Cabinet has recently announced a Mandatory Code of Conduct (‘the Code’) for landlords and tenants affected by COVID-19 (see further detail at the end of this article). However, the Code is still to be implemented by State and Territory governments, and its application is limited to those businesses eligible for the Federal Government’s JobKeeper programme.
There will be affected landlords and tenants who are not subject to the Code, and for those who may be covered by the Code, they will need to examine its application in the context of the terms of their lease.
Outlined below are some of the more frequent issues and questions that may arise with respect to your lease and its obligations.
What are the reporting requirements regarding COVID-19 infections?
Many leases will include a clause dealing with infectious disease. Such provisions will often require tenants to immediately report any instances of disease to the landlord (and possibly other relevant authorities), and to comply with any subsequent direction the landlord may then provide. Tenants should be aware that failure to do so may be considered a breach of the lease.
Can a tenant suspend or reduce their rent due to COVID-19?
Ordinarily, tenants will only be able to suspend or reduce payments of rent in the event that the premises are significantly damaged or unable to be used. However, some leases may also include a provision allowing a suspension of rent in the event of a ‘force majeure’ – being an unforeseen event, beyond the tenant’s control, that prevents it from fulfilling its obligations under the lease.
That being said, it is unlikely in the majority of cases that a ‘force majeure’ clause will be included in the lease. If no such clause exists, tenants will need to negotiate with their landlords in order to obtain a suspension or reduction in rent. This is the course of action which is currently being strongly recommended by both Federal and Territory governments, with the principles set out in the Code aimed at assisting with this issue.
What are a landlord’s rights if a tenant stops paying rent?
A failure to pay rent will usually be considered a breach of an essential term of a lease, which may entitle a landlord to terminate the lease and reclaim possession of the premises. In such circumstances, the tenant may also be exposed to a claim for damages for loss as well as unpaid rent.
However, the first principle set out in the recently announced Code is that landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period. We reiterate however that this only applies to those tenants to whom the Code applies.
Do tenants have an obligation to continue operating?
Leases will often include a provision requiring a tenant to keep their premises open and operating during usual business hours. Therefore, if a tenant ceases to operate they may, depending on the context of the closure, be in breach of this obligation.
Most leases will also contain a clause requiring a tenant to comply with any notice or order from a government authority. In the event that a tenant has been forced to close as a result of a government order or restriction arising from COVID-19, it is arguable and perhaps unlikely that such a closure would be considered to have breached the tenant’s obligation to trade.
In circumstances where the tenant has voluntarily closed, perhaps due to lack of business or due to their own health concerns, the situation may be viewed differently under the lease. Where the Code applies, it sets out that tenants are not to be penalised for a reduction in opening hours or a cease in trade due to the COVID-19 pandemic. Nonetheless, we recommend tenants discuss any closure or potential closure with their landlords.
What are the consequences if the Landlord closes the building or centre?
If a landlord makes the decision to voluntarily close a building or centre from which the tenant operates, the tenant may have rights under the lease and also under the Leases (Commercial and Retail Act) 2001 (‘the Act’). Most leases will contain provisions granting a tenant quiet enjoyment and uninterrupted access to their premises. In addition, Section 81 of the Act entitles tenants to reasonable compensation for disturbance, including where their access to the premises has been restricted. It is important to note however that this right to compensation does not apply where the disturbance is in reasonable response to an emergency, or at the direction of a government entity. If the landlord has been forced to close the building or centre compulsorily, the tenant’s rights may be more limited.
Where a building or centre has been closed, the tenant’s business will in most cases be significantly affected (particularly for retail tenants). In those cases where the Code is applicable, landlords will be required to provide rent waivers and deferrals proportionate to the reduction in the tenant’s trade.
Is any government assistance available?
The ACT Government has announced its intention to provide relief for landlords of commercial properties through a deferral or waiver of rates. Eligibility will depend on whether and to what degree the business’ income has been affected by COVID-19.
The ACT Government is also asking that landlords and tenants work together and share losses to ensure all parties are able to recover when circumstances return to normal. A Commercial Tenancy Mediator is to be put in place to support and encourage landlords and tenants to engage in these kinds of negotiations.
What about the Code?
We have alluded throughout this article to the potential benefits of the Mandatory Code of Conduct announced by the National Cabinet. What then does the Code actually say?
If you wish to read the Code in full, a copy of it can be obtained through the following link:
Essentially, the intention of the Code is to put in place a set of good faith principles with which landlords and tenants must apply, in negotiating amendments to their lease arrangements to best manage the impacts of the COVID-19 pandemic. The majority of these principles are aimed at providing protections for tenants and mechanisms by which the financial burden of their reduction in trade can be alleviated.
However, from a landlord’s perspective, it is also worth noting that the Code requires tenants to otherwise remain committed to the terms of their lease, with a failure to do so forfeiting any protections provided to the tenant under the Code.
Ultimately, the exact answers to many of the issues raised above will depend on a thorough review of the specific circumstances of the landlord and the tenant, the particular lease in question, and where applicable, the principles of the Code. If landlords or tenants are at all uncertain as to any of these issues, we strongly recommend they contact us on (02) 6140 3263 or [email protected] to assist in reviewing their lease and discussing their options.