Due to the recent outbreak of COVID-19, businesses and individuals are being forced to navigate a myriad of challenging issues which they have never had to face before. One of the most common questions businesses may ask is “I need to shut my business but what happens to the leases?”
To answer that question, the starting point is your lease agreement.
Businesses which rely on overseas supplies, tourists and overseas students, are experiencing a significant disruption in operations and a major decline in revenue. This will not only put a strain on their ability to deliver products but also on the cash flow thus making it challenging to keep the business afloat. In these circumstances, businesses are considering shutting their operations until the COVID-19 crisis is over.
Rent is a major expense for most businesses – particularly for retail shops in shopping centres. Tenants may be bound by long term leases which do not provide for early termination. One may look to the doctrine of frustration of contracts. Frustration of contract occurs when an event (beyond the parties’ control) occurs that makes the performance of the contract impossible. A frustrating event will end the contract early and allow each party to be discharged from future performance of the contract. Is COVID-19 a frustrating event? Frustration is incredibly difficult to prove and it is unlikely that a court will find COVID-19 to be a frustrating event but it depends on the circumstances of a particular case. If the government orders a lockdown, whilst difficult to prove, there may be an option for one of the parties to argue frustration.
‘Force majeure’ means an unforeseeable event that prevents you fulfilling a contract. Force majeure clauses allow parties to a contract to end the contract early where a party is affected by an unavoidable or unforeseen event such as destruction of premises or a natural disaster. Typically leases do not contain force majeure clauses. If it does, however, the clause may list lockdown as one of the force majeure events. If the government orders shopping centres to close in order to slow down the spread of virus, it may constitute a force majeure event allowing early termination.
Force majeure clauses are contractual terms which the parties agree upon execution of contract. They are express terms which cannot be implied. Frustration, on the other hand, is a common law principle.
You may want to continue operating, however, your landlord may decide to shut the building to prevent the spread of COVID-19. Your lease agreement should contain a clause in a tenant’s favour allowing a reduction in rent if you cannot reasonably access the premises. You may also consider a claim against your landlord for breach of quiet enjoyment of the premises.
Your tenant may unilaterally decide to shut their business or store due to spread of COVID-19 and demand a rent relief for the period of closure. Tenants do not have a right to unilaterally shut their business and demand rent relief, without an express condition in a lease allowing the tenant such a right unless they can successfully argue ‘frustration’ or ‘force majeure’.
Your retail tenant will be required to shut if the government requires retail shops to close. Both parties are required to adhere to notices or orders issued by public and statutory authorities. A failure to comply with government notices or orders constitutes a breach of your lease.
You tenant does not have a right to withhold rent under any circumstances. Recently, however, in response to the COVID-19 outbreak, legislation has been passed to regulate or prevent the exercise or enforcement by a retail lessor of a right that they have under the lease or the Retail Tenancies Act or Retail Leases Act. This includes prohibiting a lessor from taking possession of the premises. These measures will last no longer than six months commencing 25 March 2020.
Practical approach to leases
As the COVID-19 situation is evolving daily, we recommend that you check your lease documents and consider the actions you should be taking to minimise the damage to your business, if you are a tenant; or to your investment, if you are a landlord. You should also be reviewing your insurance policies to ascertain what losses are recoverable under your policy, if any.
If you would like further information regarding leases or simply corporate and contract law advice, please do not hesitate to contact one of our experienced solicitors on 9963 9800 or via email at [email protected]