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Dealing with COVID-19 as a landlord

24 March 2020

#Property & Real Estate, #COVID-19

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Dealing with COVID-19 as a landlord

COVID-19 has had a massive impact on business conditions and is radically affecting the use of business premises. In this article we look at the key issues for landlords.

Coronavirus is changing your building

Understand what your lease and ancillary documents say and importantly, what they don’t.

It’s probably been a long time since anyone has drafted a lease or agreement for lease and thought about the implications of a world-wide epidemic. However, there will most likely be some clauses in your lease documents that are relevant to the rights and obligations of you and your tenants.

If you haven’t done so then it is a very good idea to have lease documents reviewed to consider:

  • obligations about notification of diseases in the property
  • whether there are force majeure clauses
  • the landlord’s powers and duties about controlling access and closing the building
  • cleaning and maintenance obligations.

Clearly there may be a need to screen access to a building to minimise the risk of infected people entering. Do you have the right to exclude people or temporarily shut the premises? If you have the right to exclude people, can it be exercised at your discretion or only if there is a government order?  Does that right apply only to visitors or does it extend to tenants and their staff?

Implied terms

Even if your agreements are silent on a topic, there may be implied terms. Whether a particular term should be implied is resolved with either of two tests:

  • is the term necessary to give business efficacy to the agreement?
  • is the term so obviously intended as to go without saying?

The current unusual circumstances are fertile ground for claims about implied terms.

Force majeure

Force majeure provisions are, in our experience, not common in commercial and retail leases. However, they may be implied in exceptional circumstances. We think it goes without saying that important health measures and government orders are a defence when they conflict with a lease obligation.

Is your property also your workplace?

Depending on how a building is managed, a landlord may find itself wearing the hat of a landlord and an employer of staff in a workplace. Alternatively there may be a contracted manager who will have their staff in the building.  

What duties do you owe your tenants?

Various terms are implied in leases through the common law, such as the covenant for quiet enjoyment, or as an extension of the other lease provisions. For example, a right to recover maintenance costs as part of the outgoings has been held to imply an obligation for the landlord to maintain the building.

Are you entitled to use temperature scanners or other methods to screen access to your building?  Yes! The occupier of private property is entitled to do that and the landlord is in possession of the common areas. This does not mean that such an action is not a breach of an express provision in a lease.

Do you owe a duty to your tenants to try and screen access to the building, such as by installing temperature sensors? We would not be quick to say that duty does not exist. If the technology is available and can be reasonably deployed in the building, we can imagine the basis for arguments that the landlord has that duty. In particular, where the building is actively managed with access security.

Do you have a duty to notify your tenants of a positive COVID-19 test in the building? We think it is reasonably likely that such an obligation will be implied into leases for buildings with multiple tenancies and some degree of active management by the landlord.

Tenants in financial distress

How to deal with tenants in financial distress is ultimately a commercial question. What is certain is that this issue will arise and landlords will be considering rent waivers and suspensions. It is very important to make sure any arrangements are clearly documented so that there is no doubt about:

  • whether the waiver is a deferral or absolute for the period it applies
  • what notice is required to cancel the waiver
  • does interest apply
  • if it is a deferral, what are the repayment terms.

The other key thing to remember is that accepting possession and certain other acts might give rise to a surrender by operation of law, which could cancel claims for lost future rent. Legal advice should be obtained whenever dealing with a vacating tenant.

Tenants in breach of non-financial obligations

A lot of landlords are going to have tenants that are in breach of trading or other non-financial obligations.  

Enforcement action will potentially have reputational repercussions and may be ineffective anyway.  Courts have the power to relieve forfeiture where it is inequitable.

Another possibility is that the landlord’s actions may even been seen as repudiatory. The argument would be that it is implied in the lease that the obligation is suspended when the tenant cannot reasonably be expected to comply because of events beyond their control. 

While a tenant may be in technical breach of its lease (for example, for failing to pay rent or to keep open and trade) would any steps by a landlord to enforce its rights under the lease be successful?

We feel that it is highly likely that any steps by a landlord to end a tenancy for breach in these circumstances would be not be successful before the courts. Relief from forfeiture for a tenant is likely to be granted by the courts on equitable grounds.

Authors: Peter Nugent & Sandra Hollingsworth

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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