There is no way to describe the current global environment, other than full of uncertainty. As I put pen to paper, I am spending my days fielding calls from my Landlord and Tenant clients who are pondering what to do in an environment where businesses face a major economic shock to their revenue, interruption to the flow of supply, issues fulfilling their obligations to the health and safety of their staff and in some cases facing lockdown of the premises they occupy. As a leasing practitioner, I have not witnessed anything like this before, but I will try to create a picture for you as to what all of this means in the world of leasing.
The Immediate Horizon
Let’s consider what parties to a lease need to think about in the coming days, weeks and months if the commentary is proven correct and businesses face a major economic downturn:
- All things being equal, if you are a Tenant you have a binding lease in place, and this requires you to meet your obligations to pay rent. If you are in default of this obligation, the Landlord, strictly speaking, has the ability to terminate your tenancy without the need to give you a reasonable time to pay and you can then be liable for loss or damage that the Landlord suffers.
- Therefore, given the above it is best for you as a Tenant to be on the front foot with your Landlord – I am telling my clients if they are in this situation to approach the Landlord to discuss how the parties can work together to get through this difficult time. It is far better to be upfront with your Landlord.
- The parties may be able to reach an agreement to provide the Tenant with temporary relief to get through this time – for example, a rental discount or rent-free period. Whatever arrangements are reached, I would strongly recommend that the temporary arrangement be documented.
- Tenants cannot rely on current events to avoid their leasing obligations – particularly where there is a reduction in trade but no denial of access to a Premises. However, where either the Tenant is denied access to the building because of a decree by the Government or because the building is shut down due to COVID-19, it is arguable that the Lease is frustrated for a point in time and it may be grounds for the Tenant to argue for a reduction or abatement in rent for the period of the shutdown.
- Tenants should also be aware that most leases place work, health and safety obligations squarely on their shoulders and therefore they will need to seek advice to ensure that they are implementing appropriate procedures to ensure the health and safety of their staff – they cannot push these obligations back on to the Landlord.
- If you are a Landlord, and you are concerned that your Tenant’s inability to pay rent will have an impact on your ability to service your loans, it is time for you to start having discussions with your bank or financier. Several of the major banks have reportedly implemented teams to address these issues with their borrower clients. As a Landlord you should also be talking to your insurance broker to see whether your loss of rent insurance can be relied upon (it is not clear that this would be the case, but it is a question that you should be asking).
- If you are a Landlord and you are in the process of building a Premises for your Tenant or preparing the Premises for your Tenant to move in, then you need to look at relevant Agreement for Lease documentation carefully to see if interruptions to supply chain for materials, or interruptions to labour due to isolation policies will be a valid claim for an extension of time for delivery to the Tenant, or whether this will result in you needing to pay any penalties.
- Relating to the previous point, if you are a Tenant and you have concerns that the Landlord will now experience delays in delivering a Premises to you, you need to look carefully at what this will mean for your business. For example, if you are relocating from an existing Premises, you may need to negotiate an extension of time before you are required to vacate your current Premises or arrange for an alternative location.
- For other Tenants, there may be a need to re-negotiate handover dates and commencement dates in Leases if there is going to be a delay in components of a fitout or in completion of a fitout caused by supply chain issues or labour shortages. It may also be time to negotiate extensions of rent-free periods once the Lease starts.
Long Term Issues
Once the fog has lifted, there will be longer term issues for parties to leases that will need to be considered. These include:
- What will the rental market look like in the coming 12 months? This will be critical as Leases are reaching the time for renewal – in the majority of cases, options to renew are exercised and then there is a market assessment. I would be recommending that Tenants keep a close eye on where the market is heading and that it may be an opportunity to negotiate some good deals ahead of the date for exercise of option.
- As was the case in the month after the Global Financial Crisis (GFC), Tenants were able to negotiate quite generous incentives. Whether history will repeat itself, time will tell, but in any renewals of Leases, this is something that may be a greater bargaining tool for Tenants if the market softens as is anticipated.
- For those businesses that are severely affected by the ensuing economic downturn, there is often very little that can be done where the Landlord exercises their rights under the Lease. There may be the possibility, particularly under the Retail Leases Act to argue that the Landlord has engaged in unconscionable conduct. However, it is clear from my reading of the caselaw on this point that there is a distinction between “robust” negotiations as opposed to malicious behaviour.
Where to from here?
On an initial reaction, this appears to be uncharted territory for the world of leasing, due to the fact that restrictions on human movement impacts on both customer flows and the ability of people to occupy their business operations. However, the current circumstances parallel with any other economic shock that we’ve experienced throughout history and in that regard, it will boil down to the willingness of parties to be reasonable and to negotiate variations to current arrangements to ride through the storm.
If you are a Tenant or a Landlord and require assistance with a lease or negotiating a new agreement, please do not hesitate to get in touch with a lawyer in Coleman Greig’s Commercial Property team, who would be more than happy to assist you.