Many people have leases and in the current unprecedented circumstances of COVID 19, where many businesses are struggling or some have had to close down, we are finding many questions are being asked about whether this provides an opportunity for leases to be terminated.
The frustration of a lease discharges a tenant and a landlord from a lease. Frustration can occur when an event arises during the lease, without fault of either party, which:
- Makes a contractual obligation under the lease impossible to perform; or
- Significantly changes the nature of the outstanding contractual rights and obligations under the lease, which were reasonably contemplated by the parties when the lease was executed.
Frustration must be established by the party seeking to excuse themselves from the performance of its obligations under the lease.
Given the Australian government’s restrictions relating to the use of properties during the current COVID-19 pandemic, many tenants may question whether their lease can be frustrated.
It is unusual for this relief to be granted by Courts, therefore, a variety of circumstances must be carefully considered by a tenant who is looking to discharge a lease by frustration, including:
- Partial shutdown vs full shutdown: A tenant is more likely to succeed in a claim to frustrate a lease if its business is subjected to a full shutdown, resulting in an inability to trade at all;
- The nature of the business: If a business can continue to provide services and goods through alternative means, including online platforms or through its employees working from home, it is unlikely that a tenant would be able to claim frustration of the lease;
- The duration of the government’s restrictions vs the term of the lease: Restrictions that are only temporary or transient are unlikely to invoke frustration of the lease as the restriction may only form a short duration of the full term of the lease;
- The impact on the business: A claim for frustration is unlikely to succeed if the carrying out of the obligations under the lease has merely become more onerous or expensive.
Arguing frustration of your lease should be a last resort for tenants and tenants should first review their lease agreements to ascertain their rights and obligations in circumstances where they can no longer, or only partially, operate from the premises for the purpose permitted under the lease. Whether a lease is frustrated or not depends largely on the terms of the lease. There are several factors that need to be considered to determine whether there is an argument for frustration or not.
Frustration can have significant financial and legal implications on both a tenant and a landlord so advice should be sought before any steps are taken. The experienced team at Clarke Hemmerling Lawyers can assist you to carefully assess and review your business’ lease and trading circumstances to understand if the doctrine of frustration can assist you during this critical time.
Whether closures are temporary or will be protracted is yet to be seen. If the Government extends mandated shutdowns, then it is conceivable that courts may grant this unusual relief.
If you would like further information or an obligation free discussion about the matters raised in this blog please contact Kaviytha Raman on 08 8333 2130.
This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you. Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.