Rani Gandha: COVID-19 and your commercial lease.

Hi, my name’s Rani Gandha. I’m a partner at Turnbull Hill Lawyers who works in our commercial department.

Our clients are starting to contact us to see what they can do in relation to their commercial leases. If you find yourself in a situation where you’ve entered into a commercial lease and you want to think about what your options are now, if you need to exit from that lease, there are two key components you need to be thinking about.

The first key component is, does your commercial lease have a force majeure event clause? What a force majeure event means is an event outside a party’s control. One question that we are frequently now getting from our commercial clients is, does COVID-19 trigger the force majeure event under their commercial leases?

A force majeure event is a clause that is in a commercial contract, and particularly a lease, that covers when there is an event outside of the controls of the party. Often, that means a bush fire, a flood, an earthquake, an act of war, terrorism, and it can also include a pandemic. If your business is currently being affected, and you are looking at needing to exit your commercial lease, it’s vital that you look at your lease and see, “Do I have this type of clause?” There are three key elements to establishing that the force majeure clause will be enacted under the contract. The first is, does the situation, is it outside of your control? One of the key components here is, have you made a choice to self-isolate, or is it something that is being imposed? If it’s the government and it’s ordering a lockdown of society, then that ticks that box.

If it’s that you’re taking precautions, which you should, then you’ve got to question whether is this inside my control or something outside of my control. Another key component in that is what kind of industry am I in. If I have a factory, and I have to be at those premises, and I’m not allowed to be on those premises, that’s a tick. If I run an IT company, and I have the facilities to move my team and operate remotely, it’s not going to meet that standard. The second will focus on the actual event. It’s quite well established that pandemics can fall under this type of clause. Again, there will be a tick there, and because it is on such a global level, it is affecting more and more people, and particularly suppliers. That leads me to the third point, and that is that you have a duty to mitigate your loss.

What that means is that you have an obligation as one of the parties to see if there’s any other way you can do it. If it’s a matter that you can’t get a certain item from a supplier, can you get it from some other supplier? Is there some other way you can work? If there is not, such as say a hairdresser who has to be on those premises, who cannot see certain clients, they’re more likely to get up on these type of terminations, than if it’s just a matter of it’s an inconvenience to your business. It’s really vital that you start to think outside of how you’ve usually practised, and is there any other way that you can practice that will allow you to stay in business.

The other clause to look at in your lease is rent abatement clause. That is when there is effectively a rent holiday period, if there’s been certain events that allow you not to enter into your premises. These are more commonly used when there is a destruction to the premises which means you physically cannot get in there. Again, if there is a government-ordered shutdown, then it is reasonable to assert to your landlord that you cannot get into those premises and that may, depending on the clause, trigger a rent abatement, and that basically means you will not have to pay rent. If that occurs and it goes for a longer period of time, you may then trigger the ability to terminate the lease.

These types of clauses are not standard clauses. Each of them are going to be worded in a particular way, and how they’re worded are going to be key to what your rights are and what you can do. It’s essential that before you try and do anything under these clauses, or terminate any of these agreements, that you get some proper advice about what that clause actually means and how it best applies to you.

If you are looking for help, please contact us at Turnbull Hill Lawyers.

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