At the time of writing this article, the Australian Government is continuing to announce increasing measures to shut down businesses, including many retailers, in order to slow or cease the spread of coronavirus (COVID-19). We are working with tenants and landlords to assist in negotiating a position which will be acceptable to landlords and which will enable tenants to remain solvent and ‘hibernate’ in the short term and be able to remain viable for years to come.
Whilst the impact of these shut downs are devastating their own right, there is also the key question of how this will impact retail contracts. One of the key clauses that retailers are seeking to be released from are rent obligations in lease agreements, and our focus in this article will be on leases. However, these concepts can be applied to most other contracts including supply contracts.
The Government appears to be considering measures to provide rent relief to tenants of commercial and (hopefully this will include retail leases), however at the time of writing this has not yet been implemented. As such, at least until such measures are announced, tenants will need to rely on force majeure or frustration.
However, from many discussions with industry, it seems like the best approach is going to be a negotiated position where both parties can be satisfied with the outcome. It also seems that many parties (both tenants and landlords alike) are waiting for further announcements from the Government as this may determine how much rent relief/negotiation is going to be required.
Many contracts contain a force majeure clause, generally relieve a party from liability for non-performance if circumstances beyond the party’s control prevent fulfilment of contractual obligations.
Whether the force majeure clause is triggered depends on the drafting of the clause. From our experience, it is quite rare for a contract to specifically identify a pandemic or an epidemic, as a specific trigger for force majeure (although we expect that going forward these will be the norm). Some clauses may make reference to a Government ban or intervention which may trigger the clause, in which case it can be relied upon. However, often a shopping Centre lease will allow the landlord to close the shopping centre in certain instances (including emergency).
Usually a force majeure event will be broadly defined as “any event or circumstance beyond the reasonable control” of a party, then there may be some argument that the clause is triggered but it would need to be determined on a case by case basis.
Arguably, contracts that were entered into in February or later may be considered reasonably foreseeable and therefore, may not trigger the force majeure clause.
It is also important to note that many retail leases expressly exempt “payment of rent” from the force majeure clause.
If you are contracting with a foreign business, it may be the case that their international laws could apply to trigger the force majeure clause, such as the Government restrictions in China and Italy.
In the absence of a force majeure clause, tenants may look to the doctrine of frustration as a basis of terminating their lease or other contract. In order to rely on frustration, the obligations under a contract must be incapable of being performed due to circumstances making the performance ‘radically different’ to what was undertaken by the contract. However, it is important to note that there is a high threshold to establish frustration, so the existence of the pandemic itself would not be enough to establish frustration. Further, hardship or unforeseen loss would not trigger frustration.
Unless there is a Government ban in place which prevents performance of the lease, it is unlikely that frustration can be relied upon, although the window is still open on this one. This is also the case for supply contracts which have been delayed due to COVID-19 (unless the contract specifies otherwise).
However, a contract for event services could be frustrated due to the ban on indoor gatherings or public gatherings.
From a practical perspective, the best way to deal with this situation is to discuss with your landlord or suppliers in good faith on how to best resolve the matter as it is in both of your interests. It is unlikely that any landlord would want their tenant to go insolvent, and less likely that they would want to be looking for new tenants in this climate. Wants their tenant to go insolvent and similarly, no supplier wants a customer to stop trading with them when the situation does eventually improve.
Call us if you would like assistance in discussing rent relief and other options with your landlord or a release of your obligations under your supply contracts, please do not hesitate to contact us at or give us a call on 1300 033 934 for a no-obligation quote.
The content in this article is current as at the date of publication, however the severity and government response in relation to COVID-19 situation is changing rapidly. It is your responsibility to keep up to date with the situation regularly and seek professional advice.