15th April 2020
Most leases, including the current Law Institute of Victoria’s Lease of Real Estate (Commercial) (LIV Lease) do not deal with the unique circumstances that we are facing with COVID-19. Tenants facing significant decreases in revenue are asking, “am I entitled to any rent reduction in these circumstances and am I allowed to stop conducting my business from the premises?” MSI's Melbourne accounting member Morrows Pty Ltd provides answers.
Whilst it will depend on the specific terms of each lease, the general answer in relation to rent relief is no. By way of example, clause 8 of the LIV Lease entitles the tenant to a rent abatement in circumstances where “the premises or the building are damaged so that the premises are unfit for use for the permitted use or inaccessible.” The Premises are not damaged and therefore the right for abatement does not arise simply because the tenant is unable to use the premises – because the tenant’s customers and/or staff are unavailable due to self-isolation, or even if the tenant’s business is one of those directed by the Government to be closed.
There may be room to negotiate rent relief and we refer you to our article on this subject.
Some leases require the tenant to continue to operate its business throughout the lease term, although commonly, (as in the LIV lease), such obligation is subject to all applicable laws. Tenants therefore need to be cautious of voluntarily closing their business, as doing so may cause them to be in breach of lease.
The LIV Lease also provides, at clause 10.2, for the landlord to be able to accept the tenant’s vacating the premises as a surrender or repudiation of the lease. Tenants may therefore want to advise landlords of their intention to temporarily suspend business from the premises and even obtain the landlord’s consent to such suspension to avoid the potential termination of the lease by the landlord.
Conversely, many landlords are reluctant to close buildings, shopping centres and industrial precincts without direction from government because of the risk that doing so will entitle the tenant to terminate the lease for the landlord’s failure to provide access and quiet possession of the premises.
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