COVID-19: Developments in commercial tenancies

Written by Taylor Moore and Rebecca Halkett

The disruption to trading conditions and forced shutdowns imposed on businesses as a consequence of the COVID-19 pandemic has led the government to implement temporary measures to address the impacts on parties to commercial tenancy agreements.

On 29 March, the Prime Minister announced a six-month moratorium on evictions.  This moratorium has now been or is in the process of being implemented by each State.

On 3 April, the Prime Minister announced that a mandatory coronavirus industry ‘Code of Practice’ is being developed for all commercial and retail tenancies.  The Code will be published once the National Cabinet reaches an agreement on the details.  The Code will be mandatory for tenancies, where the tenant has a turnover of less than $50 million, and it is a participant in the JobKeeper program.

Code of Practice

Although the terms of the Code are yet to be finalised and announced, the Prime Minister’s office has released a set of principles that underpin the Code:

  • where it is possible, rent is still required to and should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome;
  • the rent relief will only be available for coronavirus-affected businesses with the reduction in turnover of the tenant guiding the rental reduction provided by the landlord;
  • there will be a prohibition on termination of leases for non-payment of rent and a freeze on rent increases (except for turnover leases);
  • there will be an obligation on parties to negotiate in good faith. Where they are unable to do so, the Code will dictate that both parties will enter mediation to resolve a rent reduction;
  • landlords will be prohibited from passing land tax on to tenants; and
  • landlords will be prohibited from making a claim in relation to a bank guarantee or security deposit for non-payment of rent.

The States and Territories have agreed to consider providing the equivalent of at least a three-month land tax waiver and three-month land tax deferral for eligible landowners.  Where implemented, these land tax benefits must be passed on from the landlords to tenants.

The Code will be discussed at the next meeting of the National Cabinet on Tuesday 7 April and once finalised, will be incorporated into state and territory legislation, where appropriate.

What about options available under the lease?

The anticipated Code is likely to be the most effective response to the COVID-19 pandemic as it is unlikely to trigger general contractual mechanisms of rent abatement, frustration or force majeure that may come to the aid of tenants in other circumstances.

Rent abatement clauses only apply where there is damage or destruction to the premises which restricts the use of the premises.  It is unlikely that the COVID19 outbreak and subsequent shutdown could be considered ‘damage’ to the premises.

Frustration brings a contract to an end where, through no fault of either party, an intervening, post-contractual event has occurred which makes performance of the contract impossible or radically different.  Case law indicates that a temporary change, such as the short-term closure of rented premises, would ordinarily not be enough to frustrate a lease.

There is no common law doctrine of force majeure.  It is instead the subject of a contractual agreement between the parties and comes down to matters of interpretation.  The ability to rely upon the doctrine of force majeure will depend upon whether your particular lease has a relevant force majeure clause.  Such clauses are, however, rarely included in standard commercial leases.

Keep an eye out for our update which will be published shortly after the Code has been finalised and announced.  In the meantime, if you have any questions or seek advice in relation to the impact of COVID-19 on commercial tenancies please contact Stuart Jackson or Michael Garry.