Should we, could we, are we trading and paying rent in our retail shopping centres?
Retail Leases and COVID19
We present a brief summary of where things are at the moment in relation to COVID19 and retail leases. This is changing every day, so please contact us for advice as required.
There is certainly uncertainty surrounding the spread of the COVID-19 virus and how companies and individuals will trade and pay rent.
The New South Wales State Government has agreed to pass amendments to both the Residential Tenancies Act 2010 (NSW) and the Retail Leases Act 1994 (NSW) as a result of the COVID-19 Legislation Amendment (Emergency Measures) Bill 2020 (COVID-19 Bill).
The changes to the legislation entitle the Minister to make regulations including:
(a) prohibiting the recovery of possession of premises by a lessor or owner of premises or land from a lessee or tenant of the premises or land under the relevant Act in particular circumstances;
(b) prohibiting the termination of a lease or tenancy by a lessor or owner of premises or land under the relevant Act in particular circumstances;
(c) regulating or preventing the exercise or enforcement of another right of a lessor or owner of premises or land under the relevant Act or an agreement relating to the premises or land in particular circumstances; and
(d) exempting a lessee or tenant, or a class of lessees or tenants, from the operation of a provision of the relevant Act or any agreement relating to the leasing or licensing of premises or land.
The Federal Government, has indicated that it will pass down a form of direction, as to what landlords are required to do and whether or not the Government will be offering financial assistance and in what capacity. This direction will be limited to the powers which the Government has at the time and subject to any subsequent change given to those powers.
It seems likely that there will be moratorium on evictions and other consequences flowing from the failure to pay rent. This will in effect give tenants a ‘rent break’, however the full rent may still need to eventually be re-paid. The details of the regulation will be important – will this apply to all leases, or only some; will tenants have to demonstrate that their issues are caused by COVID19, or will the moratorium apply across the board?
At this stage retail landlords and tenants are faced with the scenarios including:
- The tenant is closed at the direction of the Government – as in the case for uses of tattoo parlours, nail bars, spray tanners, gyms, dine in restaurants/cafes (to name a few)
- Part of the centre is closed, for example, the uses listed in point 1 or food court seating areas;
- Customer traffic flow is restricted. This could include points 1 and 2 and also a result of directions to allow for social distancing;.
- The centre is closed by direction of the Government;
- The lessor considers it is necessary for safety to close a particular premise or the centre;
- The head-lessor (provided the head lease permits the head-lessor to do so) directs the centre (or part of it) to close; and
- A tenant closes premises without direction or consent of the lessor.
Tenants cannot trade if the centre is closed.
A tenant is unable to trade if the Government has made it unlawful to trade for a particular permitted use.
A tenant may be unwilling or unable to trade in the current environment if it is unviable to trade as a result of economic costs, staff sickness or quarantines.
When assessing a tenant’s rights not to trade or the landlord’s right to prohibit trade or to close the centre, the landlord must review the lease agreed for individual tenants and any limitations or restrictions under Retail Leases Act (as varied in each state)
Most leases contain provision to notify the lessor where there may be anything dangerous or unlawful, which would include a person with coronavirus being in the premises or centre or change in the ability to use the premises or the centre for the permitted use at a particular point in time.
While the tenant must not trade where it is unlawful, failure to trade is also a breach of lease. The lease may become void or voidable, but virtue of the inability to trade. Where a contract, subsequent to its formation and without fault of either party is incapable of being performed due to an unforeseen event (or events), resulting in the obligations under the contract being radically different from those contemplated by the parties a contract may be frustrated. If a lease was terminate as a frustrated contract, neither party would have the right to compensation.
The landlord may be permitted to close the centre where the landlord considers it dangerous for it to remain open. The lessor must close the centre where is it unlawful.
Section 34 of the Retail Leases Act (NSW) and Section 54 Retail Leases Act 2003 (Vic) each provide tenants with an opportunity to claim compensation if they are disturbed by the lessor. Closing the centre could likely be considered a disturbance. The sections also provide that this section does not apply in response to an emergency or in compliance with a duty imposed under an Act or a public authority acting under authority of an Act.
The direction to close down shopping centre may be imminent, but as yet has not been given.
Some retail leases may contain a force majeure clauses. Such clauses would need to be identified if a pandemic event as a force majeure event, as defined. This, in the past has not been a normal force majeure event. This will not in itself give the tenant rise to a claim for compensation, but rather a right of termination.
There is a ‘Damage or destruction’ clause in many leases and also in section 36 of the Retail Leases Act (NSW) and Section 57 of the Retail Leases Act (Vic). These provide that if the premises or centre are damaged or destroyed, and this prevents a tenant from trading, the tenant will not be required to pay rent until the damage is repaired. In the event the damage is not repaired within a reasonable time, either party may terminate the lease. A virus infection present in the centre does not seem to be damage or destruction.
As such, if the centre is required to close by an Authority, the tenant can still be required to pay rent while the centre is closed, and where the lease remains on foot – subject to any new regulations.
Finally, landlords and tenants may have insurance to cover non payment of rent or business interruption. Landlords and tenants should review any insurance policies before taking action to abate or reduce rents or to cease or prohibit trading or trading conditions.
The verdict.
Unless the centre is closed as a result of an order from an Authority acting under an Act, the tenant legally must operate and has no right to seek relief or compensation from the landlord. This however, this does not take into consideration the current health, social or economic crisis we are currently facing on a global level. Many landlords, in the interest of preserving the value and trade of retail centres and securing tenants for the future will undoubtedly be working with tenants to protect tenants and assets. And the government is in the process of legislating a moratorium on eviction and other consequences of failure to pay rent during this crisis.