COMMERCIAL TENANCY MANDATORY CODE
By: Than Nguyen 07/04/2020
Prime Minister Scott Morrison announced earlier today that the National Cabinet has agreed in principle to a mandatory Code applicable to commercial tenancies. The States and Territories will now proceed to enact legislation to implement the Code. Details at this stage are sketchy but it is expected to include the following provisions:
1. the Code will apply to commercial tenants with turnover less than 50 million and are eligible for the Job keeper program;
2. Landlords cannot terminate the lease or draw on on security bonds or bank guarantees;
3. Landlord must offer rent waivers and deferrals proportional to reduction in turnover;
4. Rent waivers must account for at least a 50% of rent reduction;
5. Rent deferrals would be payable over the remaining term of the lease or for a minimum period of 12 months;
6. Annual rent increases will be frozen;
7. Reduction in statutory outgoings such as council rates and land taxes must be passed on to the tenants in the appropriate proportions;
8. Landlords cannot enforce penalties for breach of trading hours obligations;
9. Landlords cannot charge interest on unpaid rent;
10. Landlords are required to negotiate in good faith with the tenants. If the parties cannot reach agreement by negotiation, either party may apply for binding mediation.
For example, if a commercial tenant has been paying $4000 a month in rent suffers 50% reduction in turnover, that tenant would be entitled to request 50% rent relief equivalent to $2,000 half of which will be in the form of rent waivers ($1,000) and the other half ($1,000) in the form of rent deferrals to be repaid over the remaining period of the lease. It means that for the relevant period, that tenant must still pay rent and $2,000 per month. The deferred amount of $1,000 per month could be paid by installments over the remaining months of the lease.
But if the business has been forced to shut down and suffers 100% reduction in turnover, the tenant will be entitled to request 100% rent relief 50% of which ($2,000) would be in the form of rent waivers and the other 50% ($2,000) will be in the form of rent deferrals to be repaid by installments over the remaining months of the lease.
It would appear that the Code would have very significant impact and coverage as a significant majority of small-business commercial tenants would probably have no difficulty proving that their turnover has been reduced by more than 30% due to the coronavirus.
The concept of binding mediation is particularly novel. Traditionally, mediation is a process whereby the parties are guided to negotiate a mutually commercially acceptable outcome. It is not clear if the government intends to confer quasi-judicial powers on mediators appointed by the relevant State agency such as Small Business Commissioner in NSW and its equivalent in other States.
State governments are expected to provide land tax relief to landlords. The government also expects the banks to provide support to landlords in dealing with the Code but it is not clear if this will be made mandatory.
The purpose of the Code is as the Prime Minister put it to help small business ‘hibernate’ through this difficult period and be ready to resume operations once the restrictive measures such as social gathering and distancing requirements are removed.
The Code is effective from 3 April 2020 which was the date the National Cabinet agreed to a set of principles to guide the Code. It will remain in force as long as the Job keeper program remains operational.
THE EFFECT OF COVID-19 ON LANDLORDS AND TENANTS
By: Than Nguyen 25/03/2020
We are going through unprecedented times in terms of our way of life and economic well-being. The Australian government has announced quite drastic measures banning not just social contact but the number of businesses from operating including clubs, pubs, gyms, entertainment outlets, nail and beauty salons etc. Restaurants and cafes are restricted to providing takeaway only. It is clear that these measures would cause significant impact on the lives of many Australians.
One pertinent question is what will happen to commercial and retail leases and the respective rights and responsibilities of landlords and tenants? The Prime Minister Scott Morrison has indicated that the governments are working through this issue and it is hoped that the government will provide more certainty and clarity in the next few days. The issue is obviously complicated as it potentially affects many parties including landlords, tenants, banks, lenders and utility suppliers.
Leases are contracts and like any other contract can be voided by a force majeure clause or frustration. A force majeure clause typically present in contracts of delivery ordinarily provides that the parties may terminate the contract without liability due to an unexpected event such as earthquake, cyclone, war, industrial action or government order etc.
However, most leases do not contain a force majeure clause except to the extent that if the premises were destroyed or damaged, rent will abate to such extent of damage. For example, if the premises are destroyed completely by fire, the tenant will not have to pay rent. However, if only half of the premises are destroyed and the other half is still usable, rent will be reduced to 50%.
Another ground to void the lease is based on the doctrine of frustration. Frustration occurs when there is a supervening event without the default of either party and for which the contract makes no sufficient provisions so significantly changes the nature of the contractual rights and obligations that the parties reasonably contemplated at the time of its execution that it would be unjust to hold them bound to perform the contract under new circumstances.
In other words for frustration to occur, there must be at least 3 factors: (1) an unexpected event; (2) beyond the parties’ control; and (3) makes performance of the contract impossible or radically different from that which the parties reasonably contemplated when they entered into the contract.
Examples of cases
in Krell v Henry [1903] 2 KB 740, the defendant hired the plaintiff’s flat solely for the purpose of viewing the coronation process of King Edward VII. When the coronation was cancelled, the defendant refused to pay the balance of the rent. The plaintiff sued and the court agreed with the defendant that the coronation process was the foundation of the contract. As it was no longer possible, the defendant was discharged from the agreement to pay the balance of the rent.
In Halloran v Firth (1926) SR (NSW) 183, the tenant leased 20 acres of land with a right to mine over a further 857 acres. During the course of the lease, an amendment to the Mining Act 1906 allowed the third party to enter the land to prospect for minerals. The tenant stopped paying rent and argued that the object of the lease had been frustrated because she could no longer mine the land as if she had done so, she would have interfered with the statutory rights of the third party. The court disagreed and held that the lease was not frustrated. The court held that for frustration to apply, the real gist of the contract must be destroyed. In this case, the gist of the lease was the tenant’s right to mine and the Act had not destroyed that but just rendered the lease less beneficial to the tenant.
In Cooke v Moore [1935] 1 WWR 374, the tenant leased the farm and equipment and agrees to pay rent being 1/2 share of the crop to be grown on the land. There were extraordinary weather conditions and the plague of insects in one particular year which damaged the soil to the point that it was useless. The court held that the lease was frustrated as performance of the contract became impossible due to an unexpected event beyond the parties’ control.
In National Carriers Ltd c Panalpia (Norther) Ltd [1981] A.C. 675, the tenant leased a warehouse for a term of 10 years. The only vehicular access to the premises was by a single street. 5 years after the start of the lease, the local authority closed the street owing to the dangerous condition of a heritage building situated opposite to the warehouse. The heritage building could not be demolished without the consent of the relevant authorities and the process would take 20 months to complete. During that time, the tenant was unable to use the warehouse and so stopped paying rent. The court held that on the fact of the case, the lease was not frustrated as the disruption of 20 months to a 10 year lease was insufficient to meet the test when the lease still had 5 years to run.
In City of Subiaco v Heytesbury Properties Pty Ltd (2001) 24 WASCA 140, the tenant signed the lease for 99 years. There was a subsequent amendment to the town planning legislation which prevented the tenant from using the premises for manufacturing purposes. The tenant argued that the lease was frustrated. The court did not agree. However, this case was decided based on the facts that the tenant’s real intention was to maintain the lease for anticipated re-development and not for manufacturing purposes and that the leasehold estate was still both usable or could be sold.
In Li Ching Wing v Xuan Yi Wong [2004] 1 HKLRD 754, the tenant signed a lease for 2 years. However, he was subjected to an isolation order due to the outbreak of SARS in Hongkong. The tenant sought to terminate the lease by frustration. The court rejected that argument on the basis that the 10 days isolation order was insignificant in terms of the overall use of the premises.
In Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255, the licensee entered into a billboard licensing agreement. However, after a building was constructed which reduced the exposure of the advertising billboard, the licensee sought to terminate the licence agreement on the basis of frustration. The court rejected this argument on the basis that although the advertising exposure had been reduced, the parties’ contractual obligations were still capable of being performed. Just because the advertising billboard had been less commercially desirable did not necessarily mean that the licensee could frustrate the contract or licence agreement.
SUMMARY
In summary, the following factors to be taken into account on a case-by-case basis:
- Does the lockdown or shutdown issued by the government make the performance of the lease impossible?
- If not, is the performance of the lease radically different to that when the parties signed the lease?
- How long is the order in place for?
- How long is the lease term?
- How long is the remainder?
It should be noted that the government may introduce legislations to override or modify the effects of the common law cases. It is still too far early to come to any concluded or definitive agreement or arrangement to deal with the effects of Covid 19. In the meantime, both landlords and tenants should exercise common sense flexibility pending further announcements from the government.