Options for landlords and tenants in the Covid-19 world?

  • Author : Samuel Hopper - 23-03-2020

The Morrison government today announced a number of measures to protect tenants in the current crisis.

One is to increase the minimum amount of a statutory demand for non-payment of debt from $2,000 to $20,000 and to allow six months for payment – up from the current 21 days.  I might have more to say on that in a later post.

The other initiative suggested today was that a moratorium may be placed on termination of certain lease for non-payment of rent.

The ABC’s website says this:

One of the things the National Cabinet is working on is rentals

The Prime Minister says the cabinet is working to “ensure there is a ban, under rental agreements” that people could be thrown out of their tenancies if they can’t pay rent during the coronavirus crisis.

He says the same would apply to commercial tenancies. 

Mortgage relief is also on the agenda.

“Equally, we’ve been working with the banks to ensure that people can get mortgage relief in those circumstances to reduce as many of their fixed costs,” Mr Morrison says. 

“There will be waivers that will be on things like electricity and things like that from utilities, so working on getting the price costs down and increasing the amount of support and payments there.”

See also: https://www.google.com.au/amp/s/eliteagent.com/tenants-may-get-rent-relief-but-landlords-need-protection-too/amp/

We will need to wait to see the detail of these proposal as they emerge and I will post more information whenever I can.

In the meantime, lawyers for landlords and tenants should be aware of the other issues that are emerging in this area.

Abatement of rent clauses

Abatement of rent clauses are unlikely to provide much assistance in this are – they usually only operate when the property has been damaged (eg s 57 of the Retail Leases Act 2003 (Vic)).  However, it is worth checking your leases, just in case.

Force majeure clauses

Although they are rare in leases, it is worth advising clients to check for a force majeure clause.  I have even heard of (but not seen) a form of force majeure clause in a lease that makes specific reference to an epidemic!

Frustration of leases

In the absence of an applicable abatement of rent or force majeure clause, an emerging (or re-emerging) issue is whether a lease can be frustrated at common law if the tenant is unable to trade on account of mandatory closures.

Whether, and if so when, a lease is frustrated is a question that has vexed leasing lawyers for many years.  The issue has been discussed in a number of recent commentaries and I have put a list of recommended further reading at the bottom of this post. In summary:

the last time frustration of leases was considered by the High Court of Australia was in Firth v Halloran (1926) 38 CLR 261. The decision did not produce a clear majority on whether a lease is capable of being frustrated;

a number of English wartime cases held that a tenant remained liable for rent even when wartime restrictions prevented the tenant using the premises. However, a number of American cases around the same period held that leases of premises for the sale of liquor were frustrated by Prohibition laws in the USA;

the House of Lords considered frustration of leases in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675. In that case, the only road allowing vehicle access to the property was closed by the local council.  Although the Court held that it did not apply on those facts, the Court did find that the doctrine of frustration could apply to leases;

most commentators suggest that National Carriers will be followed in Australia and frustration of leases has received some support through cases like Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17;

in City of Subiaco v Heytesbury Properties Pty Ltd(2001) 24 WAR 146, the Full Court of the Supreme Court of Western Australia dealt with a lease for a permitted purpose limited to manufacturing.  However, a change to the planning scheme prohibited manufacturing from the leased premises. The tenant argued that the lease had been frustrated.  the Court held that the tenant took the lease to participate in a redevelopment of the site and, accordingly, the lease had a commercial value and was not frustrated;  and

in Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd (2010) 14 BPR 27,605, the tenant took a lease with the permitted purpose of planting and cultivating lemon myrtle trees. The tenant said its reason for entering the leases was in fact the control of certain native growth in the area which was prevented by government stop-work orders.  The tenant argued that the lease was frustrated.  Barret J held that the lease in that case was not frustrated because the tenant could still cultivate lemon myrtle trees.  The fact that the tenant could not achieve a purpose that was not stated in the lease was not sufficient to frustrate the lease.  His Honour also cited the four-question test of frustration approved by the High Court in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337. The four questions are:

(1)     What was the substance of the contract, being the assumption or condition or state of things which was necessary for the fulfilment of the contract?

(2)     Was that condition or state of things prevented?

(3)     Was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties?

(4)     Was the change so unexpected that, if performed, the contract would be radically different from that which was contracted?

I have heard of a case in Hong Kong in 2004 in which a tenant argued that closure of its premises due to SARS was a frustrating event.  The Court in Hong Kong held that the closure was temporary and, as a result, the lease was not frustrated: see Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754.  I may report on that case in the coming days.

The business closures announced today suggest that, in the absence of statutory intervention, frustration of leases will rear its head in the near future, particularly if business closures are protracted.

Lawyers advising landlord and tenant clients of closed businesses should become familiar with this area of law and its impact on their clients’ circumstances.  The current state of the law suggests that, in the absence of either a commercial resolution to a tenant being unable to pay rent or legislative intervention, some tenants may fall back on arguments about frustration of their leases in the face of the current crisis.

For further reading, I recommend:

Croft, Hay and Virgona, Commercial Tenancy Law (4th ed, 2018) at [6.10].

Duncan and Christensen, Comemrcial Leases in Australia (8th ed, 2017) para [50.1400] and [50.1500].

https://corrs.com.au/insights/legal-consequences-of-COVID-19-outbreak-on-contracts-force-majeure-and-frustration

Marcus Hoyne, ‘Frustrated by Coronavirus: Aren’t we all?’ available at https://foleys.com.au/resources/Corona%20Virus%20&%20Frustration_article_180320.pdf

https://www.allens.com.au/insights-news/insights/2020/03/covid-19/

Thanks to my colleagues Jamie Bedelis of Bedelis Lawyers and barrister Callum Dawlings for their assistance with this post.

About the Author

Samuel Hopper

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