In brief - Widespread changes across New South Wales in response to the coronavirus pandemic will have significant ramifications for landlords seeking to enforce their leases as tenants raise arguments of force majeure or frustration, or request a rental abatement. Landlords must be careful to preserve their legal rights when negotiating with tenants during this current period of uncertainty.

The COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) (the Act) was assented to on 25 March 2020 to provide for a suite of regulatory changes to be made to both retail and residential tenancies. Regulations created pursuant to the Act will expire in no later than six months, or such earlier date as determined by Parliament. 

How the powers will be applied remains uncertain, however, it is presumed at this stage that landlords may be prohibited from accessing bank guarantees or other types of security where a tenant is in default, and regulations may be made that otherwise exempt tenants from needing to pay rent for a period of time.

For further information on the impact of the Act, please see our article Impact of the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW)

What issues should landlords be considering

It is important landlords carefully read the terms of their leases to understand how they will respond to impacts of the coronavirus.

  • Informal discussions with tenants. It is likely that you will have discussions with your tenants regarding rental payment or the payment of any other obligations under the lease. Any informal discussions with tenants regarding negotiation of payment for rental, outgoings or any other obligations, may be relied on by the tenant at a later stage to avoid obligations under the lease, particularly if you have alluded to or implied that a reduction of the payment amount is possible or that leniency will be accepted. You need to be cautious of any representations made regarding tenants' obligations during these informal types of discussion to ensure that your position is protected. 

  • Rental abatement. Leases may include express terms setting out when a tenant would be entitled to a rental abatement which will need to be considered. Standard rental abatement clauses are unlikely to apply where a business is required to vacate premises for the purposes of cleaning on account of a potential coronavirus contamination. Depending on the terms of the lease, it may be a commercial decision for landlords whether they will agree to a rental abatement.

  • Certainty is key. If you are giving your tenants a concession on rent, outgoings or any other payment obligations under the lease, you need to formalise this in writing to ensure the parties understand their obligations and the scope and operation of the concessions that may apply.

  • Market rent determinations. Care must be taken to ensure that if a concession is given it does not affect any later market rent determination. Landlords should also review their market rent clauses. It is standard for leases to contain clauses requiring a determination based on what would reasonably be expected to be paid if the premises were unoccupied and offered for rent for the same or a substantially similar use. Arguably, particularly in industries such as hospitality and travel, comparable rental returns may have been materially reduced in response to coronavirus related shutdowns.

  • Insurance. Before agreeing to give a concession to your tenant you should first check any insurance you have in place which may respond to loss of rent. Steps should be taken to ensure that any such concession does not affect that cover. Checks should also be in place to ensure that a concession does not affect any covenants under your mortgage(s).

  • Default arising from insolvency. The government has announced significant changes to both the personal and corporate insolvency regimes. Directors have also been given some relaxation on insolvency laws, with directors, in certain circumstances, temporarily being relieved of their duty to prevent insolvent trading. It also appears that the Emergency Measures Act 2020 (NSW) may step in to prevent termination of a lease on such grounds. 

  • Protect cash security deposits. Any cash security deposit held by you which secures the performance of the tenant's obligations under the lease may be an arrangement that creates a "security interest" for the purposes of the Personal Property Securities Act 2009. Any such interest should be registered on the PPSR. If you fail to do so within the required timeframe this may result in your interest in the cash vesting in the tenant in circumstances where it enters into liquidation.

  • Force Majeure. If performance of a lease obligation is inhibited due to coronavirus, your lease should be reviewed for the existence of force majeure provisions. Force majeure may operate to discharge a party from its obligations under a lease where there has been some overwhelming event, such as war, nuclear events, natural disaster and pandemics. The terms must be expressly set out in the lease and cannot be implied into it. If such a clause is triggered, it may allow a party to discharge the lease, temporarily suspend its terms, excuse a failure to perform, or allow for an extension of time for performance of an obligation. 

  • Frustration. Frustration of a contract exists where, without the fault of either party, the contract is now "impractical" to perform. If a lease is frustrated it brings the contract to an end. This may be of benefit or detriment to a landlord depending on the commercial realities of the lease, Some indicia of frustration of a lease are:

    • Lease term. It will be more difficult for a tenant to make out a claim for frustration where the term of the lease is lengthy. 

    • Length of the frustrating event. Similarly to the lease term, the length for which the frustrating event persists will be relevant. 

    • An event renders an essential term of the lease incapable of performance. If an essential obligation under a lease becomes impossible to perform, frustration is more likely. Again, this requires careful consideration of the terms and the circumstances. 

  • Repudiation of lease. Landlords and tenants alike must be careful not to incorrectly assert frustration or that a force majeure event has occurred as this may amount to repudiation of the lease, and require the payment of compensation.  

  • Illegality. Some terms of a lease may be rendered void on the basis that they are now contrary to a restriction imposed by an authority, e.g., requirements on minimum trading hours, or the Emergency Measures Act 2020 (NSW). Landlords should take care before enforcing rights under a lease that they are not relying on the non-performance of a now void or otherwise defunct term. We will keep you updated as these changes are implemented. 

  • Retail Leases. If you are a retail landlord, you have additional obligations or protections under the Retail Leases legislation (as applicable in each state). By way of example:

    • Landlords may be exempt from disturbance costs in emergencies 

    • Trading hours may be affected. Landlords should we wary where they take steps to enforce a lease where a tenant ceases, or decreases trade in accordance with Government mandated shutdowns. Trading provisions in a lease may not be enforceable and may be void. 

    • Current market rent. Landlords should be mindful of provisions which adjust rent in accordance with the "current market rent" (as defined by retail legislation). Arguably, particularly in industries such as hospitality and travel, comparable rental returns may have been materially reduced in response to coronavirus related shutdowns. 

    • No hardship provisions. Unlike residential tenancies, which are governed by the Residential Tenancies Act 2010 (NSW), retail leases do not have any provisions which would allow a party to terminate the lease on compassionate grounds. Landlords are entitled to require compliance with the terms of a lease (where they remain valid and subject to the new Emergency Measures Act 2020 (NSW)). 

Landlords need to ensure that they keep up to date with the latest regulatory changes as the leasing landscape continues to rapidly shift in New South Wales to respond to the challenges of COVID-19. 

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.

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