Leasing update: abandonment of premises by tenant during COVID-19 and relief against forfeiture

Leasing update: abandonment of premises by tenant during COVID-19 and relief against forfeiture

06 August 2020 Authored by: Graham Roberts, Oliver Caine   |   Topics: Insolvency and restructuring, Litigation and dispute resolution, Property and planning law

The Court has considered whether a commercial tenant abandoned a lease by ceasing to trade due to COVID-19 and relocating its stock to a warehouse.

It was decided the tenant had not abandoned the lease and it was ordered that the tenant was entitled to relief against the landlord’s termination of the lease, despite a history of late payment of rent.

Notably, the failure to pay rent, ceasing to trade at the premises and the termination of the lease had occurred before the nationwide implementation of the National Cabinet Mandatory Code of Conduct in relation to commercial leasing (Code).

Sneakerboy

In Sneakerboy v Georges Properties Pty Ltd, the tenant sought relief against the landlord’s termination of the lease for non-payment of rent and alleged abandonment of the lease premises. After terminating the lease, the landlord called on the bank guarantee that had been provided by the tenant under the lease. At the time of the tenant’s application, the landlord had not re-let the premises.

The tenant explained it had ceased trading at the premises due to COVID-19 restrictions on the number of persons that could be present in the store, in addition to concerns regarding staff safety. The stock had been removed due to security concerns and to enable the tenant to conduct online sales. The tenant had also removed IT equipment to enable it to undertake a technology refresh, although the furniture and fixtures remained in the premises.

Although there were other factual disputes, they were not decisive.

The Court was required to consider whether the tenant had abandoned the premises and whether it was entitled to relief against the termination of the lease in circumstances where it had a history of rental default prior to the implementation of the Code.

The tenant contended that the landlord had terminated the lease to avoid the anticipated implementation of the Code, but this was not accepted by the Court.

The Court noted that the following principles applied:

  • Where a lease is terminated for non-payment of rent, a court will normally grant relief provided the landlord and other persons concerned can be put in the same position as before the forfeiture or re-entry.
  • The power to grant relief will generally only be exercised on the condition that the tenant pay outstanding rent and the landlord’s costs of the proceedings.
  • The court may require the tenant to reinstate any bank guarantee as part of granting relief.
  • A court will only decline to grant relief in exceptional circumstances, including, for example, where the tenant is hopelessly insolvent.

The Court took the view that, in circumstances where the lease was terminated before the Code took effect, the landlord could not rely on the disadvantages it would suffer as a result of the Code (i.e. due to the mandatory rental reduction provisions) to argue that the tenant should not have relief against forfeiture.

In applying the legal principles, the Court made the following observations:

  • The landlord was mistaken in its belief that the tenant had abandoned the lease. The tenant’s decision to temporarily cease trading and relocate stock to a warehouse was a reasonable decision in the circumstances.
  • As the lease had not been abandoned, the Court was only required to consider whether the tenant should have relief from forfeiture for non-payment of rent.
  • Although the tenant had a history of late payment of rent, the landlord had the benefit of a substantial bank guarantee, which it had called on (resulting in an excess of funds above what was payable under the lease).
  • The tenant’s history of late payment was not enough to displace the usual outcome that relief be granted. There was no evidence that the tenant was insolvent.
  • A significant consideration was that, if the lease had remained on foot, the tenant and the landlord would have been obliged to negotiate a rent reduction under the Code. After having called on the bank guarantee, the landlord had compensated itself fully for the tenant’s default and had likely received more than what it would have been entitled to receive following a rent reduction.
  • Accordingly, the Court determined that the tenant was entitled to relief against forfeiture.

However, the Court noted that the relief would be conditional on the tenant reinstating the bank guarantee and paying the landlord’s costs of the proceedings. The Court indicated that it would allow some latitude as to the timing of the reinstatement of the bank guarantee but sought further submissions from the parties regarding that issue.

Comments

The Court’s decision provides a practical illustration of the ways in which the effects of COVID-19 can impact parties’ rights under commercial leases.

The decision highlights that:

  • a tenant may not have abandoned a lease by merely ceasing to trade at the premises as a result of COVID-19
  • in relation to breaches occurring before the implementation of the Code, landlords cannot rely on the disadvantages they will suffer as a result of the Code to oppose relief against forfeiture.
  • the courts are aware of the practical effects of COVID-19 on leases and may grant tenants some latitude by crafting the conditions of relief against forfeiture.

As the landlord had validly terminated the lease due to the non-payment of rent, there may have been a different outcome if the premises had been re-let prior to the tenant’s application.

If you would like more information regarding these issues, please contact Graham Roberts on +61 7 3231 2404 or another member of our litigation and dispute resolution team.

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