Leases during COVID-19 – What legal matters should I consider?
Published: 2 April 2020
We recently asked Mark Gunning, Barrister at Nine Wentworth Chambers, Sydney for his view as to the operation of leases in the current economic climate.
Here is his opinion on Force Majeure Clauses and the Doctrine of Frustration.
Force Majeure clause
If there is a force majeure clause (that is, a term allowing the parties to suspend performing their obligations or terminate the contract due to a list of often unpredictable events), the clause will be construed against the party seeking to rely upon it. A party seeking to rely on the clause will need good reason and must ensure that the unprecedented event is really making it impossible to perform its duties. You will need to carefully read this clause to see whether an event such as a pandemic is included and what the clause allows the parties to do under such circumstances. If there is no force majeure clause, a party to the contract may rely upon the doctrine of frustration.
Doctrine of Frustration
A contract such as a lease can be terminated by operation of law, on the basis that the contract has been frustrated by events which occur after the contract was made, which make a party’s performance more difficult or costly, or impossible. The doctrine of frustration requires a fundamental change of situation before there can be an automatic termination of a contract. The part seeking to terminate the contract must show that the current situation is fundamentally different from the situation contemplated by the contract. Relevantly to the current economic circumstances, you should note that frustration is not easy to justify. The mere fact that a party’s performance of a contract will result in hardship is not necessarily enough to establish frustration (as the change in situation may be temporary and short term). Frustration will be easier to satisfy if the change in situation is so great that the remainder of the lease will be forfeited.
If the landlord and tenant are in dispute over a Retail Lease, one or both parties can refer the dispute to the Registrar of Retail Tenancies Disputes for mediation. Under section 68 of the Retail Leases Act 1994 (NSW), a retail tenancy dispute cannot be the subject of court proceedings unless the Registrar certifies that mediation has failed, or the court is satisfied that mediation is unlikely to resolve the dispute.
Of course, if you are having issues with a Lease, you should also consider the incentives and regulatory changes the Government has been making in relation to both residential and commercial leasing arrangements.
This information is for general purposes only and is no substitute for obtaining legal advice tailored to your individual situation.