Australia: Revisiting early commercial decisions in COVID-19 and the law

Commercial decisions caused by COVID-19 have led to many early decisions being driven by real or perceived income and cash flow concerns without a clear consideration of the applicable laws.

If this has happened it is recommended that the law is now looked at in respect of these past decisions as the future ramifications can be unfortunate.

Common issues include:

Leases

The preferred position is always to reach a written variation agreement with the lessor. This normally begins with a notification notice to the landlord's agent / landlord that trading conditions have changed.

If you as a Lessee have been affected and you have not done this yet you should do it now. This notification should be in writing via a short email or letter, and should clearly explain how your turnover and / or income is being impacted by COVID-19. Recently the Victorian Government have released new regulations that specify how the notification and negotiations should be made, which we go into further detail in our recent article available here.

Lessors and their agents should also try to negotiate an arrangement or compromise in good faith during this period. Negotiations can generate certainty and a better relationship with the Lessee going forward. Otherwise, the prospects of recovering rent in arrears after the pandemic is over may be low if negotiations are not attempted. These negotiations should be carefully considered and any agreement should be reduced to writing if possible.

Many Lessors will look to enforce their rights after this period of pandemic is over.

Retail especially was hit hard commercially early in this pandemic and many stopped paying rent completely or made unilateral reductions. Although understandable commercially, the fact is it is highly unlikely to be in accordance with the lease or the law.

In a lease of property it is very unusual that there is a force majeure clause. Such a clause allows for suspension of the contract in various circumstances outside the control of the parties which are identified in the clause. Even if there was such a clause it is unlikely to apply under its terms as pandemics are rarely included as a defined event.

Under common law if the doctrine of frustration applies it leads to the termination of a lease. The doctrine of frustration requires there to be changed circumstances that mean that the contract cannot be performed objectively and it is a very difficult test to achieve on the basis of decisions by the Courts in this area. Note that the only relief that can be given is termination and not rent relief.

There is likely to be a right to quiet enjoyment terms in commercial property leases. If the landlord has locked you out rights can arise the circumstances from this pandemic have led to decisions being by Government or by the lessee rather than the lessor where a vacation of premises has occurred.

The legal basis for a change of lease are set out in principle in the National Code of Conduct released on 7 April 2020 by the Australian Government and then legally effected by each State which may also amend the federal principles. Recently, the Victorian Government has released regulations that include some variations and exceptions to the code. For further detail, please refer to our article here.

Even if the provisions do not apply due to technicalities there are still commercial reasons why the landlord and lessee should still use them as a basis to lead discussions.

The National Code allows for a reduction in rent of at least 50% of the turnover reduction of the Lessees' business. This reduction is then 50% forgiven and 50% deferred for repayment over two years.

It is important to note that the lessee will need to provide information of their business turnover (BAS statements are a good start or appropriate other financial reports) to negotiate.

It is more important to note that the Code sets out a minimum reduction and a larger reduction or larger forgiveness may be more appropriate.

Note landlords do want to retain good tenants and will not want to eventually terminate into what could be a difficult leasing environment for them after the pandemic. Leases cannot currently be terminated for non-payment of rent but may be terminated for other breaches of the terms of the lease, depending on the circumstances.

Employment Changes

Some employers in panic stood down permanent staff or cut their permanent employees hours without due process.

The JobSeeker amendments introduced on 7 April 2020 have introduced amendments to the Fair Work Act that have allowed unilateral decisions by qualifying employers to enforce reduced hours for their employees. A process must however be followed.

If the employer is not a qualifying employer then the existing Fair Work provisions apply which include the ability to reduce employees to 75% of current hours if 75% of employees vote for in favour. Also there is the power to enforce annual leave where the employee has over two weeks owing.

Working from home - Legal Issues.

Many legal issues arise from the working remote environment we are currently in and many employers have not fully considered these.

As a starting point it is worth reviewing the privacy implications and a useful starting point are the guidelines set out by the Office of Australian Information Commissioner.

Dealing with Suppliers

Many supply requirements will have changed markedly under the current trading positions and unilateral decisions to amend should be reviewed for their legality. The availability of force majeure clauses and the common law doctrine of frustration described above need to be considered.

Amendments to the contracts often relate to reduced volumes or suspension which can be as of right or by agreement. These legal requirements are generally contractual in nature.

For issues in relation to the transport and retention of suspended goods, parties should also be aware of their rights and obligations under contract as well as the tort of negligence and the doctrine of bailment.

We are happy to advise and assist in any review process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.