How does coronavirus affect your retail, residential or commercial lease?
One notable aspect of the effects of the coronavirus is that, because of the inevitable interconnectedness of our society, many response measures aimed at helping some particular group have a negative effect on another. The impact on residential and commercial lease agreements is a case in point.
Impact on landlords of laws preventing evictions
An obvious example is the proposal to protect from eviction – at least for a limited time – tenants unable to pay rent because they have lost their income. So the landlord loses rental income, and is denied the usual remedy of removing the defaulting tenant, and getting a replacement who will pay.
Some such landlords may be substantial commercial entities with some capacity, temporarily, to absorb losses of this kind; and perhaps to access some other provision of the Australian government’s economic response package. But others may be self-funded retirees whose principal retirement income is derived from property rental.
It is thus difficult to depict, in general terms, the effects of the coronavirus in this area – among, of course, many others. However it’s always useful to start with the underlying basic principles.
What is the difference between a residential and a commercial lease?
A lease may be a commercial lease or a residential lease (often referred to as a residential tenancy). An important subcategory of commercial leases is retail leases – broadly speaking, leases of premises used for selling to the general public.
The distinction between a residential lease and a commercial lease lies essentially in the purpose for which the lessee (usually called the “tenant” in residential leases) occupies the leased premises. Custom and practice differ between the two.
In a commercial lease, the owner of the premises is typically called the “lessor” and the occupier the “lessee”; while in a residential lease the owner is – a rare survivor of the move to gender neutral language – the “landlord”; and the occupier the “tenant”. The terms and conditions of the occupancy are also typically different.
All leases are contracts subject to rules applied by law
But all leases are contracts. A special kind of contract, to be sure, but contracts nonetheless.
Contracts are, simply, agreements which the courts will enforce. The only pre-conditions are that there is clear and voluntary agreement between the parties as to what each of them will do or receive, and that there is “consideration” – some kind of recognisable value exchanged between the parties.
It doesn’t matter that the “consideration” might not be commensurate with the commercial value of what is being exchanged: the term “peppercorn rent” (meaning a token payment for rental occupancy) derives from the practice of serfs paying a peppercorn for the right to farm a patch of the lord’s estate.
In modern leasing, of course, the values are commercial: lessees/tenants pay a rental for the benefit of being able to occupy the lessor’s/landlord’s premises, largely as though they were the owner.
But the important point is that leases are simply special kinds of contracts, and are subject to the rules the law applies to contracts.
Operation of contracts not affected by emergencies
The starting point is that emergencies, by themselves, do not affect the operation of contracts.
The rights and obligations under contracts which are leases do not change simply because a state of emergency comes into existence. These rights and obligations can change only in one (or more) of four ways, set out below.
Contractual provisions dealing with inability to fulfil contractual obligations
Contracts – especially commercial contracts – can and often do include provisions saying what is to happen if circumstances impede the fulfilment of obligations.
Contracts often contain “force majeure” clauses excusing the parties from compliance in the event of things such as wars and natural disasters. (Please see Do force majeure clauses apply to the coronavirus pandemic?)
Commercial leases generally contain “rent abatement” provisions, excusing a lessee from paying rent if the premises become unusable (unless, of course, this was the fault of the lessee).
Frustration of a contract
Even if contracts don’t contain provisions of this kind, courts will sometimes hold a contract to have been “frustrated” where a party cannot fulfil an obligation for some reason beyond that party’s control.
Parties can agree to vary the contract in an emergency
The fact that parties have entered a contract doesn’t prohibit them from acting cooperatively in an emergency and agreeing to vary one or more terms of the contract, for a limited period or indefinitely.
Obviously, it is prudent to record this agreement in writing, in some way that makes clear that the parties have varied the contract.
Parliament can pass laws affecting contracts, including leases
Under legal systems derived from England – “Westminster” systems – the parliament is the supreme law-making authority, and can pass laws affecting contracts.
How this operates is complicated a bit by the division of powers in Australia between federal and state governments, but the basic position is that parliament can, if it wants to, pass laws affecting contracts including, obviously, leases. (Please see Coronavirus and the machinery of government – how do governments enforce the restrictions they impose?)
Provisions for dealing with coronavirus not found in commercial or residential leases
Looking at the four possibilities we’ve just set out, how do (or don’t) these work in relation to leases and the impact of coronavirus?
The contractual provisions typically found in a commercial lease aren’t likely to help much. Rent abatement clauses refer to the condition of the leased premises, and not (for obvious reasons) to the ability of the tenant to pay.
Importantly, while retail leases require the landlord to provide a disclosure statement to the tenant providing some guidance to the likely trade, leases generally do not guarantee income and, indeed, usually include clauses to the effect that whether the premises are suitable for the business is entirely a matter for the tenant.
Equally, these leases are written on the basis that downturns in trade, and hence revenue, are simply part of the rich tapestry of life.
In short, leases (whether commercial or residential) don’t include provisions helpful in dealing with the impact of the coronavirus.
It is possible that rent abatement clauses might free a mall shop lessee of the obligation to pay rent if, for example, access to the mall is closed by an emergency order, but this will turn on what exact terms are in the relevant clause.
Mutually acceptable negotiated agreement between landlord and tenant
From a commercial, rather than a legal, standpoint, it seems sensible for landlords and tenants to engage with a view to agreeing to some short-term variation on rental payments. All other things being equal, an ongoing relationship is of benefit to both parties, so there may be benefit to both parties in, say, agreeing to a temporary rent holiday.
The same is true for a landlord and tenant in a residential tenancy. (Please see: “I lost my job and can’t pay my rent!” – COVID-19 creates anxiety for tenants and landlords.)
Residential tenants protected from eviction where income lost due to COVID-19
Legislatively, measures have already been passed to shield from eviction residential tenants unable to pay rent because their own incomes have been lost due to the impact of coronavirus.
As has been said, that may or may not have a serious impact on the landlord, but the landlord can enquire as to whether the tenant is entitled to one of the recently-announced $1500 per fortnight stimulus payments, in which case the tenant could reasonably be pressed to make at least some payment.
Work health and safety obligations not to be overlooked
In all of this, workplace health and safety requirements should not be lost sight of. Typically commercial premises will be workplaces and, while WHS obligations fall mainly on the occupant of premises which is the operator of the business conducted there, lessors should not assume immunity, especially given that current movement and access rules are enshrined in legislation of one kind or another. (Please see: Your staff are all working from home – so what are your health and safety obligations as an employer? and Asking my employees to work from home – what’s the risk?)
In summary, the coronavirus doesn’t free people from their legal obligations, or deprive them of their legal rights. But that doesn’t mean that there shouldn’t be a cooperative effort to share financial pain, in the interests of enabling a return, later on, to something approaching normality.