COVID-19 Q and A: Tenancies, Financial Relief, Inability to Perform Contracts, Frustration of Contracts, Debt Deferment, Insolvency and more

Below are three (3) Questions & Answers that we have prepared in light of a recent surge in requests for advice on similar questions. The questions are:

“I am worried that my commercial tenant won’t pay the rent for six (6) months, and on top of that, I may not be able to evict them. What if at the end of the six (6) months’ they leave and don’t catch up the rent – all the time whilst I have been paying the monthly mortgage repayments?”

“We own and operate a wedding venue business which includes catering and other packages. We have a number of weddings booked in May/ June 2020 where there will be 200+ guests. The future brides/grooms have paid 20% deposits. Now, due to COVID-19, they are seeking to cancel the wedding and seek a full refund to be paid saying that the contract has been “frustrated”. What are our obligations?”

“One of our customers has just given us notice that he has suspended, or that he is about to suspend payment of his debts. I have an existing judgment/order against him (pre COVID-19) for $19,000. I am worried that other creditors, including secured creditors, will recover in full whereas I need to wait six (6) months following service of a Bankruptcy Notice to commence bankruptcy proceedings. What are my options?”

The answers to each of the questions are found below.

Q:

“I am worried that my commercial tenant won’t pay the rent for six (6) months, and on top of that, I may not be able to evict them. What if at the end of the six (6) months’ they leave and don’t catch up the rent – all the time whilst I have been paying the monthly mortgage repayments?”

A:

The National Cabinet Mandatory Code of Conduct dated 7 April 2020 (to be implemented in relevant state and territory legislation) sets out that:

1. You may not be able to terminate the lease and evict your commercial tenant;

2. You are required to offer the tenant a proportionate reduction in rent payable (i.e. proportionate to the reduction in trade as a result of the COVID-19 pandemic, plus a subsequent reasonable recovery period) in the form of waivers and deferrals;

a. Rent waivers must constitute no less than 50% of the total reduction (and should be higher in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement). Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement;

b. Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties;

3. No interest, charges or fees can be applied to the relief provided. You cannot raise rents or claim on any security during the period (i.e. bank guarantees);

4. If you receive a benefit from your financier that is in fact greater than any benefit provided above, it should seek to extend that to the tenant in a proportionate manner;

5. You should where appropriate waive recovery of any other expense or outgoing payable by a tenant during the period they are unable to trade, but you can reduce services as required in such circumstances;

6. As elucidated above in terms of minimum periods for repayment of any rental deferrals, if any other repayment is negotiated, this should be over an extended period and no such repayment should commence until the earlier of the pandemic ending or the existing lease expiring, taking into account a reasonable subsequent recovery period.

The provisions will apply to tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth JobKeeper regime, with an annual turnover of up to $50M. They are weighted in favour of the commercial tenant viz the landlord. However, as referred to above (and expanded upon below) you may be able to obtain parallel relief from your financier. The financiers in turn are receiving various benefits from the government/ the Reserve Bank. This is all part of the government’s “hibernation” plan.

Practically speaking, you should contact your financier immediately. For instance, one option that may be available is to seek the aforementioned parallel relief (i.e. the loan repayments are reduced accordingly and the loan term is extended and interest is capitalised). The Australian Bankers Association has confirmed that the major lenders are, generally speaking, informally providing such kinds of relief to such landlords (where certain conditions are met). However, you need to be conscious that this may affected any landlord insurance in place. Also, it is a wise move to accurately record the arrangement in writing in a separate Deed. If the tenant then leaves at the end of the relevant period, there will be a reduced financial impact from that given the parallel relief obtained from the financier (albeit there will likely be a longer loan term and higher interest repayments). The tenant will ordinarily be liable for loss and damage if they left prior to the expiration of the lease, failed to make good, etc. You would also ordinarily be able to draw on any security and/or claim under any guarantee and indemnity. The tenant’s exposure may be high where you are unable to find a new tenant that is prepared to pay the same or a similar rental that you were receiving prior to COVID-19.

*Note: there does not appear to be any equivalent rental relief provisions (as opposed to eviction moratoriums) for retail tenancies in NSW at this point in time. However, based on the announcements made to date, such regulation is expected to be implemented in due course.

Q:

“We own and operate a wedding venue business which includes catering and other packages. We have a number of weddings booked in May/ June 2020 where there will be 200+ guests. The future brides/grooms have paid 20% deposits. Now, due to COVID-19, they are seeking to cancel the wedding and seek a full refund to be paid saying that the contract has been “frustrated”. What are our obligations?”

A:

The Public Health (COVID-19 Restrictions on Gathering and Movement) Order 2020 (pursuant to s7 of the Public Health Act 2010 (NSW) took effect from 31 March 2020 and operates for a period of ninety (90) days). The Order prohibits a person from leaving their place of residence without a reasonable excuse.

Attending a wedding is not a reasonable excuse unless it falls within the circumstances referred to in clause 6(2)(d) of the Order. That clause sets out that a person must not participate in a gathering in a public place of more than two (2) persons unless it is a gathering for a wedding at which there are no more than five (5) persons (including the person conducting the service). The definition of public place is broad and includes premises that are used on payment of money by persons whom may consist of only a limited class (i.e. a private event at a wedding venue). There is a risk that the wedding venue may even be classified as an entertainment facility and be prohibited from opening at all: clause 7(1)(c) of the Order. Otherwise, clause 8(1)(c) of the Order requires occupiers or operators of premises to ensure that the space is sufficient to ensure that there is 4 square meters of space for each person on the premises at any time.

As such, it is likely that the Order can be relied upon by the future brides/grooms to claim that the contract is frustrated as the agreement relates to a gathering in a public place in numbers that are expressly prohibited. Much will depend on whether the event in question could reasonably have thought to have been foreseen (i.e. the date that the contract was entered into will be critical).

*Note: the doctrine of frustration applies where an intervening event has occurred, through no fault of either party which makes a contractual obligation impossible to perform or transforms a contractual obligation into a fundamentally different obligation. If frustration is established the contract is terminated automatically (in futuro).

As there may be supervening impossibility through government order, there may be frustration. However, as any such wedding is scheduled to occur in the future, whilst it may be uncertain, it may not be entirely correct at this point to say that it is impossible to perform. The Order could always be revoked (PHA s7(5)). Such revocation may occur before the date of the wedding. Conversely, the Order may also be extended. Given the available information to date, it may be reasonable to assume that the contractual obligations in respect to weddings in May/June 2020 will not be able to be performed.

If the wedding cannot proceed, the parties may be relieved from future obligations. The Frustrated Contracts Act 1978 (NSW) provides that in this case, the deposit/s may need to be repaid.

The above also depends upon whether or not your terms and conditions have a “force majeure” clause. This may operate to exclude liability where your inability to perform is caused by forces beyond your control. For instance, any such clause may allow you to unilaterally postpone the wedding to a date after the force majeure event has ceased (obviously with consultation with the future bride/groom as to any mutually convenient dates). This analysis will be heavily dependent on the exact wording of any such clause.

Q:

“One of our customers has just given us notice that he has suspended, or that he is about to suspend payment of his debts. I have an existing judgment/order against him (pre COVID-19) for $19,000. I am worried that other creditors, including secured creditors, will recover in full whereas I need to wait six (6) months following service of a Bankruptcy Notice to commence bankruptcy proceedings. What are my options?”

A:

It is true that the recent amendments to the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) mean that the time period for compliance with a Bankruptcy Notice issued on and after 25 March 2020 has been extended to six (6) months. Also, you will not be able to issue a Bankruptcy Notice at this point in time as the threshold has been increased to $20,000.

However, if the debtor has communicated an intention to you that he has suspended or is about to suspend payment of his debts when due, then this may be an act of bankruptcy under the Bankruptcy Act, s40(1)(g).

The Bankruptcy Act provides for a wide range of acts of bankruptcy that may be relied upon (see Bankruptcy Act s40(1)). These may be more difficult and more expensive to prove, but you do not need to wait six (6) months.

If the debtor does pay you but also eventually declares bankruptcy (or another creditor applies to the Court for relief and orders are made declaring the debtor bankrupt) you may be exposed to a preference claim from any subsequently appointed Bankruptcy Trustee, meaning that you may need to repay any amount received if it is paid by the debtor within certain timeframes (see Bankruptcy Act s122(1)).

*Note: as for corporate debtors, a similar mechanism may be in place for you to prove actual insolvency (as opposed to relying on a Statutory Demand and the presumption of insolvency).

It would be prudent to check your terms and conditions with the debtor. If you are a secured creditor, there is no restriction in place to enforcing any security and it is unlikely that the preference regime would apply.

Finally

COVID-19 has caused (and is continuing to cause) radical changes – to the law and the application of it (amongst many other things). Recent announcements have been made by the NSW government to the effect that small businesses may be granted up to $10,000 for unavoidable business costs such as legal fees. If you need advice in any area of business, commercial law or insolvency law, now is the time to seek it.

We can assist you with a range of issues including: advice; negotiating/drafting new agreements; advocating on your behalf in respect to disputes under existing contracts; taking steps to enforce obligations and much more. Each case is unique and requires tailored advice.

gavinparsonsadm

Date posted: 2020-04-08