March 18th, 2020
As a result of the disruption to daily lives caused by the COVID-19 outbreak most business owners have faced a lot of issues. Losses are mounting due to the major impact of the disruption, and many businesses have called on their landlords for help in reducing the impact of the coronavirus.
This article considers some legal obligations between landlords and tenants in the context of the disruptions caused by COVID-19, known as coronavirus.
Rights under the tenancy agreement amid a public health emergency
As a starting point, we should consider the legal obligations and rights of the landlord and the tenant set out in the tenancy agreement.
In general, unless the tenancy agreement provides otherwise, there is no duty on the landlord to offer any financial concessions, such as rental rebates or waivers in case of public health emergency. In the event of a pandemic outbreak the tenant continues to be bound by its obligations to promptly pay rent and comply with other terms of the tenancy agreement.
Most commercial tenancies do not provide upfront concessions on the tenant and do not set out the obligations of a landlord in situations like a disease outbreak or identify the party to bear the costs of compliance with any governmental regulations.
Since the landlord is not obliged to help the tenant, what then are the avenues available to an affected tenant?
Most tenancy agreements contain a force majeure provision, which address circumstances where unexpected external events prevent a party to the contract from carrying out their duties. In that case, the affected party may be entitled to relief, including a suspension of contractual obligations; exclusion from certain liabilities for non-performance or delay; and even termination of the contract in limited situations.
It is for the parties to agree on the scope and definition of events that would constitute force majeure under the relevant contract, as there is no prescribed or universally accepted definition of “force majeure”. Force majeure events could include terrorist attacks, natural disasters, war, strikes and also any epidemics.
Thus, due to the fact that force majeure clauses are usually narrowly drafted and only include specified events, its interpretation usually requires specific legal advice and will be heavily dependant on the circumstances of the particular case.
Additionally, force majeure may only be invoked when the event referred to has prevented or delayed performance of the contract and not simply because that event exists (for example, caused economic hardship or made performance of the contract inconvenient or commercially unfeasible).
However, the effect of successfully exercising a force majeure clause may lead to a suspension of rent or part of rent, or of the right to terminate the tenancy agreement.
Frustration of purpose
If the external event was not reasonably foreseeable, and it fundamentally changes the contractual obligation to become radically different from what was agreed in the contract, the doctrine of frustration would apply, and the contract is said to be frustrated and is automatically brought to an end.
In the present circumstances of the coronavirus pandemic, it may be possible for tenants to seek to rely on the doctrine of frustration if it can be demonstrated that the outbreak of COVID-19 frustrates the purpose of the contract.
If successful, the tenancy agreement can be set aside in its entirety since the contractual obligations have been rendered impossible to perform and/or its underlying purpose is radically different.
However, all the above is to be determined by the courts on a case by case basis, meaning considerable costs in commencing and defending legal proceedings can be incurred in proving frustration of purpose. The threshold is very high, the fact that the contract is more difficult or expensive to perform is usually insufficient to show frustration of purpose.
There may be limited options for the tenant to seek concessions under the tenancy agreement. However, the tenant and the landlord could adopt a collaborative approach when handling unforeseen crises to limit damage for both parties.
1. Communication – the starting point should always be an open dialogue for negotiation, to agree, for example, rent reductions, or a partial surrender of the lease.Landlords can consider making concessions and give tenants the ability to perform their obligations along a workable timeline during the period of difficulty.
2. Replacement tenants – finding a replacement tenant could help mitigate losses, save costs and agent fees and promote business continuity for both landlord and tenant.
In conclusion, in a global pandemic such as the current coronavirus outbreak, there is limited contractual recourse on the tenant to seeking concessions under their leases to enable their businesses to survive. However, landlords and tenants could work together to get through these times of difficulty.