Just like many other sectors, retail and commercial tenants and landlords are currently under pressure and desperate to know what their options are in the current COVID-19 crisis.
There have been reports that the Victorian Government will shortly announce the introduction of new legislation relating to rent relief for tenants dealing with the Coronavirus. Unfortunately, nothing has been announced as yet and it is uncertain whether such relief measures will extend to commercial tenants as well as retail and residential tenants, or what those measures will entail. We will publish another update as soon as we have clarity on any new proposed legislation.
It is important to know that despite any legislative measures that are implemented in the coming days / weeks, both landlords and tenants need to understand the issues emerging in this area.
Here are our top tips for both commercial and retail landlord and tenants as well as matters to consider:
- Ask your landlord for a rent abatement or reduction, but be careful about what you ask for.
If you don’t ask, you won’t know what your landlord is prepared to offer. You should ensure you carefully consider what you’re asking for as there can be a material difference between a rental abatement, meaning the rent is not payable for a period, and a rental deferral, meaning the rent for a period remains payable, but at a later date. You should ensure any agreement is properly documented and reflects your understanding of what is agreed.
- Check if your lease has a “force majeure” clause.
- A “force majeure” clause operates to exclude liability where a party’s failure to perform its obligations under the contract is caused by unforeseen circumstances. Generally speaking, “force majeure” clauses are not common in lease but if your lease has one, this may be the easiest way to avoid your obligations under your lease.
- No “force majeure” clause – look to the doctrine of frustration.
- In the absence of a “force majeure” clause, the common law doctrine of frustration may in limited circumstances be able to be relied upon as basis for terminating the lease. There is an extensive body of law that relates to the doctrine of frustration and the consensus is that it can be difficult to establish.
In the case of COVID-19, however, the orders imposed by the government may prohibit the conduct of the permitted use which may be cause for the lease to be frustrated.
The specific circumstances of each case should be considered and parties should seek advice in relation to whether the lease is frustrated and whether or not termination of the lease is desirable.
- Check your insurance cover.
- It may be that your existing insurance policy provides some level of protection to compensate you for your loss in this scenario i.e. a pandemic. Depending on the wording of your policy, business interruption cover may provide some respite. If you are unsure of your rights and obligations or wish to seek advice about how best to proceed, please seek legal advice to discuss your specific circumstances.
- Carefully consider any request for a rent abatement or reduction, but be careful with what you agree to.
- If you are asked for a rental abatement or reduction, you should ensure you carefully consider what you’re agreeing to as there can be a material difference between a rental abatement, meaning the rent is not payable for a period, and a rental deferral, meaning the rent for a period remains payable, but at a later date. You should ensure any agreement is properly documented and reflects your understanding of what is agreed.
- Security deposits and further security.
- Consider what your leases says about the security deposit and how this can be accessed. Further, if you are considering agreeing to a rent abatement or reduction, think about asking for further security in exchange for grating that relief to protect your right to receive rental after the rental abatement period ends. This could be particularly important if the tenant is placed under any form of external administration in the future. For example, requesting a GSA over the assets of the tenant or a charge over property of the tenant or a guarantor of the tenant. You should obtain legal advice in relation to such security and your rights under it.
- Check your insurance.
- Under the LIV standard lease, there is provision for the landlord to obtain insurance against a prescribed period of loss of rent and outgoings. Ask the question and make the relevant enquiries with you insurer. If you are unsure of your rights and obligations or wish to seek advice about how best to proceed, please seek legal advice to discuss your specific circumstances.
- Do you want a vacant premises in the face of this epidemic?
- Although you may choose to be compassionate towards your tenant’s position and their requests for a rent reduction or abatement in this current environment, you may also be concerned about your personal situation and if you can afford to not have your usual rental income.
Despite the above, it is worth considering whether having a vacant premises in these times as well as entering into negotiations in an unfavourable market both now and following the COVID-19 crisis is wise.
Whether you are a tenant or a landlord, if you are seeking assistance as to how to best proceed in this uncertain environment please contact us on (03) 9614 7707.