COVID-19: impact on contracts and leases31 March 2020
The rapid spread of the COVID-19 pandemic and the responses taken by government, businesses and the community are significantly impacting the ability of parties to leases and contracts for sale to be able to perform their respective obligations.
Landlords and tenants should consider the following:
- Retail and residential leases, payment of rent and termination of leases—normally a tenant can’t withhold rent because it is experiencing financial difficulty, however as Prime Minister Morrison announced in his press conference at 6.30pm on 29 March 2020, the State Governments will have the power to make regulations relating to retail and residential tenancies as follows:
|Regulation power||Guiding principles considered by National Cabinet|
Granting the tenant relief from the obligation to pay rent or outgoings
Termination of leases prohibiting the repossession of a premises
Prohibiting the exercise of a landlord right in a lease where necessary to protect the health, safety and welfare of the tenants
Residential tenancy and retail lease regulations will cover the Residential Tenancies Act 2010, the Retail Leases Act 1994 and any other Act relating to the leasing of premises or land for residential or retail/ commercial purposes.
The regulations will expire six months after the day on which the regulation commences.
- Force majeure—A Force Majeure (FM) is a contractual construct designed to provide relief to parties affected by an unavoidable or unforeseeable event, depending on the scope of the definition of FM in your contract and the wording in the operative clause. FM clauses provide for rent abatement while the event persists, include rights to extend timeframes to comply with obligations and also include termination rights if the event does not end within a specified timeframe. FM clauses in leases are usually limited to physical damage and usually don’t extend to pandemics and government closures, such as caused by the COVID-19 virus.
- Frustration—where contracts do not contain a FM clause, the common follow up question is whether a party can rely on the common law doctrine of “Frustration” or “Frustrated Contracts” legislation (which applies in certain states). It’s very unlikely this doctrine will apply to property transactions in the circumstances arising with the COVID-19 pandemic. To be successful, there must be an intervening event or change of circumstances (not due to the default of either party) resulting in a contractual obligation becoming incapable of being performed due to a radical change in the character of the obligations undertaken by a contract—essentially amounting to a fundamentally different situation from that contemplated by the contract. Mere hardship (including that performance becomes more expensive or onerous) does not constitute frustration.
- Quiet enjoyment—quiet enjoyment clauses will not likely be a remedy available to a tenant in a pandemic situation as the landlord did not cause the disruption to access / use of the premises and the tenant’s lease interest (title) remains secure.
- Agreements for lease—agreements for lease that provide for the completion of works to construct premises before lease commencement typically have “delay event” / “extension of time” clauses that allow timeframes for completion of works to be extended for delays outside a party’s control.
- Centre closure and must trade clauses—clauses requiring that the tenant keeps the premises open for trade during the centre trading hours will unlikely be enforceable where access to the premises is restricted, whether by the landlord or government closure. Landlords should review their leases to determine their rights to close centres (in the absence of government mandate to do so) and the consequences of doing so.
- Loss of rent insurance for landlords and business interruption insurance for tenants—landlords and tenants should carefully review their insurance policy wording to determine whether they are covered.
Contracts for sale
In NSW, vendors and purchasers should consider the following:
- timeframes—if the time for something to be done or to happen in the contracts not stated, then a “reasonable time” applies. The impact of COVID-19 may allow for an extended ‘reasonable period’
- post-exchange searches and enquiries—ordering these enquiries may be affected due to the unavailability of service providers. This may impact the parties’ ability to enter into a contract or complete a contract where completion is conditional upon provision of certain searches
- pre-settlement inspections—with social distancing regulations in place, we suggest Purchasers undertake pre-settlement inspections on the day of settlement via video conference, and
- completion dates—parties must complete the contract by the date for completion specified on the front page. If they do not complete on that date, a party can serve a notice to complete giving the defaulting party 14 days from the date that the notice is served to complete before the contract is terminated and the deposit forfeited.
Parties who already have signed documents should:
- be aware that in the case of leases, legislated protection is now available to tenants. It’s unclear at this stage whether rent concessions granted by legislation to tenants mean that landlords will be entitled to recover that unpaid rent at a later stage, and
- consider negotiating a commercial variation to the contract for relief, extensions to completion dates and timeframes. Any agreement in this regard should be documented by written agreement between the parties.
If you intend to enter into a contract for sale now, you should:
- consider inserting special conditions to allow for either party to postpone completion if they are restricted by doing so due to COVID-19 causing a land registry office, revenue office or bank to close
- check your contract allows for electronic signing and exchange of contracts, and
- where not already mandatory, elect to use PEXA to effect completion of the contract.
If you are a tenant, you should be very cautious entering into a lease in the current circumstances. But if you choose to do so, you should:
- review extension of time provisions the landlord can exercise and their effect on a tenant’s ability to commence trading from leased premises
- ensure the FM clause in the lease is not limited to physical damage and destruction, but extends to general unusability or inaccessibility, as it’s unclear whether rent relief granted by new legislation will extend to leases subsequently entered into
- review and ensure compliance with any landlord mandated reporting obligations in relation to infectious diseases, and
- ensure that any offer and acceptance of rent or trading relief is documented in writing with express agreement from the landlord or its agents.
A landlord should consider the following:
- ensure robust extension of time provisions in Agreements for Lease that match those provided for in the building contract with the landlord’s builder
- review its lease portfolio to understand its potential exposure to rent abatement claims
- implementing amended trading hours, distancing measures, and reasonable customer limits
- ensure that its leases require that tenants report cases of infectious diseases
- review its insurance policies to determine if coverage is provided if tenants or their customers are infected by COVID-19 and the source of infection was the premises or shopping centre
- ensure a consistent line of communication to its agents and managers especially about any rent or trading relief, and
- maintain all correspondence in writing in relation to negotiations and grants of any rent or trading relief to tenants in the event of any future disputes.