Now is the time to review your contracts, determine the scope of any force majeure clauses and your options if the clause is triggered or frustration is claimed, writes Property & Commercial Partner, Barry van Heerden.
The outbreak of the Coronavirus and subsequent social distancing and containment measures have negatively impacted local tourism, retail, manufacturing and supply chains. Attwood Marshall Lawyers have been proactive in providing our clients with timely legal advice to protect their interests. This blog asks:
What are your rights as Landlord or Lessee in a Lease if COVID-19 prevents you from performing your contractual lease obligations?
A party to a lease (or any commercial agreement) may be able to seek relief through reliance on a ‘force majeure clause’. While reliance on the clause may give the other party certain additional rights, such as the right to terminate the lease, it may not always be applicable.
Frustration is a common law principle which may apply when COVID-19 prevents a landlord or lessee from performing their obligations under a lease.
What is force majeure?
Force majeure clauses are often included in commercial contracts to allow parties to cease or suspend performance of their obligations under a contract in the event of an unforeseen circumstance caused by forces beyond the control of the contracting parties.
The term force majeure translates to ‘superior force’, and may include acts of God, war, riot or invasion, national emergency, government action including strikes, terrorism or the imposition of embargo, or extreme weather events.
Does your lease have a force majeure clause to cover COVID-19?
A party will need to assess whether the lease contains a force majeure clause, and whether COVID-19 is covered under the clause. It may be that force majeure clauses in existing commercial contracts do not contemplate events like a pandemic or public health emergency, however sound legal advice is needed to determine this as it ultimately depends on the drafting of the particular clause
You should also consider if the existing clause also accounts for consequential events, such as enforceable social isolation, quarantines, industry shutdown and government policies on work stoppages, travel bans and lockdowns.
Who has to prove force majeure?
The party seeking to rely on the force majeure clause bears the onus of proving both the event falls within the ambit of the force majeure clause and that the event has prevented that party from performing some or all of its obligations under the contract.
If Covid-19 is covered, how can a force majeure clause affect a commercial lease?
It will depend on how the clause is drafted and what the process is to follow when there is reliance on the clause. It may include any of the following:
- Oblige a party affected by a force majeure event to notify the other parties to the contract that a force majeure event has arisen or may arise;
- Suspend the affected party’s obligations under the contract;
- Permit termination by either party where suspension has endured for an extended period.
Frustration of contract: an option if there is no force majeure clause
If there is no force majeure clause, or if COVID-19 falls outside of the ambit of the clause, but the consequences of COVID-19 are making it impossible for a party to perform their contractual obligations, an alternative basis for termination could be the common law doctrine of frustration.
What is contractual frustration?
Parties must demonstrate the ability to perform the contract has been radically diminished by the event so that performance of the contract has become commercially impossible. Where a contract has been found to be frustrated, the contract is terminated automatically at the point of frustration and future obligations are discharged. The event which brings about the ‘radical’ change is referred to as the frustrating event. Obligations which were to be performed before the frustrating event will remain binding.
It must be remembered if it becomes difficult or expensive to comply with the contract it will not be covered by frustration. It must be physically impossible for a party to comply with its obligations under the contract to rely this doctrine.
Can you negotiate instead?
Lessees who wish to request lower rents and longer payment terms instead of attempting to argue force majeure or frustration, should discuss ways to do this with a commercial lawyer. It’s advisable for lessees in a Complex to form an alliance and to renegotiate rent as a group with the assistance of a commercial lawyer who can negotiate effectively and draft appropriate amendments to their current Leases.
How can Attwood Marshall Lawyers help?
Attwood Marshall Lawyers is an experienced Property & Commercial law firm, currently working on an influx of COVID-19 litigation matters. We are ready to take legal action on your behalf. If you need urgent legal advice and representation, call us today. Property and Commercial Department Manager Jessica Kimpton on 07 5506 8214 or email firstname.lastname@example.org today.