Following the recent outbreak of the Coronavirus (COVID-19) pandemic, many nations have reacted with drastic measures in a bid to limit the contagion. In Australia, the most recent measures include the indefinite closure of ‘non-essential’ businesses. As a result of these measures, many businesses are now assessing their contractual rights and the legal implications under their contracts, including commercial leases and service contracts.

 

Infectious Disease Provisions

Most leases include an infectious disease provision. These clauses generally require the tenant to provide the landlord and relevant Authorities with notice of any infectious disease. Where the infection is confined to the premises, the tenant must, at its own cost, take necessary action to prevent the spread of the disease – including fumigating the premises.

A failure to comply with these provisions is a breach of a lease covenant. The landlord may seek to terminate for breach and sue for damages.

 

Force Majeure

Due to the rapidly evolving circumstances of the Coronavirus outbreak, it is not inconceivable that many commercial and/or retail buildings may be forced to shut down as the Government continues to introduce further measures to limit the contagion.

Generally, a force majeure clause excuses parties from their contractual obligations and liabilities in circumstances beyond their reasonable control. These clauses expressly stipulate specific events and may include an ‘Act of God’ or events such as epidemics, pandemics and Government acts.

As there is no common law doctrine of force majeure, the ability to rely on force majeure is subject to the commercial agreement between contracting parties and is generally determined on a case-by-case basis. Subsequently, parties should review their contracts to confirm that a force majeure clause applies and the application of such clause.

In order to rely on force majeure provisions, a party will need to provide written notice of the force majeure event to the other party. In conjunction with issuing a notice, the party should engage with the other party to assess the implications of the force majeure event on the contract and agree to viable commercial solutions.

Although force majeure clauses are often found in commercial contracts including building contracts, they are rarely included in standard leases. As a result of this pandemic, it may be prudent to consider including force majeure clauses in leases moving forward.

 

Frustration

The doctrine of frustration is recognised at common law and (in many Australian states) by statute. This doctrine operates to end a contract in circumstances where the obligations under the contract become impossible to be performed or have been radically transformed. These circumstances can be an intervening, post-contractual event or an event that has arisen outside of the parties’ control (or not through their fault). However, it may be difficult for an aggrieved party to establish frustration of a contract due to its narrow application.

For instance, frustration cannot be established where the contract has an operative force majeure clause; the intervening event is the fault of either of the parties; performance has merely become more onerous or expensive; or the change is only temporary. Where frustration is successfully established, the contract will generally be at an end.

At common law, the House of Lords decision in Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4 provided the presiding ruling on losses from a frustrating event ruling that “the loss lies where it falls.” However, legislation in states such as New South Wales, South Australia and Victoria provides alternative or ‘fairer’ results to parties in light of frustrating events on a case-by-case basis.

 

Rental Reductions or Abatement

Most leases include provisions that allow for a rental reduction or abatement in certain circumstances. These common clauses usually relate to damage and destruction of the premises. As a consequence, for most leases rent is unlikely to be reduced or abate as a result of a pandemic. However, this will depend on the drafting of the specific clause in the lease and will need to be determined on a case-by-case basis.

The circumstances of the shut down and the interpretation of each lease will be different in every case.