COVID-19 - Negotiating your Lease Terms
Commercial Tenancy: 01 April 2020
We are assisting our landlord and tenant clients regarding the impact COVID-19 (also known as Coronavirus) has had on their leasing arrangements. One of the major concerns is the ability to make lease payments, as COVID-19 has financially affected many people, from loss of jobs, closure of businesses and loss of income from rental payments.
The Victorian Government may shortly introduce legislation to address this situation. As a guess, this legislation may limit the ability to terminate a lease under certain circumstances (for example non-payment of rent) but rent will continue to accrue. This means that at the end of the COVID-19 pandemic tenants may be left with a big debt to pay. This situation is not beneficial for either landlord or tenant.
We suggest that landlords and tenants contact each other early to understand the other parties' circumstances.
If a tenant is financially affected by COVID-19 and a landlord's cash flow allows, it may be an option to negotiate a lower rent for a period of time on the basis that if the new rent is not paid the old rent will continue to accrue as a debt that will need to be paid at some time. The lease could also be extended to take into account the period of lower rent. This arrangement would give the landlord some certainty of rental income and the tenant is given some relief and will not have a big debt to pay later.
Whilst the focus has been on the financial impact on tenants in the media, a tenant must remember that a lot of landlords rely on rental income and are often not corporations earning millions of dollars but are using rental income to pay the mortgage. An agreement to reduce the rent may not be financially viable for the landlord.
It is important to remember in any lease negotiations that these difficult times will pass and the goodwill of tenants and landlords in lease negotiations will pay off in the future.
How to document the variation of the lease terms
If the parties agree to vary the terms of a lease, a written agreement should be entered to prevent ambiguity or any misunderstanding of the terms that have been agreed. To record a change to the terms of the lease, a document called a variation of the lease should be entered into between the tenant and landlord. It is preferable that the variation be in the form of a deed, however it is not a formal requirement and a lease can be varied by a written agreement between the parties. If the lease is registered it can be varied by a registrable instrument in the approved form (except for a variation to the parties, the term or the area of the registered lease). If the lease is subject to a mortgage the mortgagee's consent should always be obtained otherwise the varied terms will not be binding on the mortgagee.
Electronic execution
Whether a variation of the terms of your lease is documented by an agreement or a deed is an important question because signing documents is becoming increasingly difficult given the social distancing requirements in place.
In Victoria a deed must be in paper form and signed in wet ink. Delivery of the deed to the other party would require you to leave your home or workplace to go to the post office, solicitor's office or other parties' property. This will become increasingly difficult with the evolving series of restrictions on movement to combat COVID-19.
Most business agreements, including a variation of lease (but excluding a lease) can be signed electronically. This process is governed by the Electronic Transaction (Victoria) Act 2000. Having a deed document, the variation of lease is prudent, however considering the impact of COVID-19 an electronically signed agreement may be the preferable way to document a lease variation.
The electronic signature will need to meet the legal requirements of a signature, ensuring that the reliability, consent and identification of the signing party is satisfied. The document should also include an appropriate clause that the parties intend to be bound by electronic signatures.
If a company is executing an agreement you should consider the ways that a company can validly execute an agreement or deed, especially electronically. We suggest that you seek legal advice regarding company execution.
Other legal considerations
A variation of certain lease terms could operate to surrender the lease and create a new lease between the parties. For example, an amendment to the rent or term may trigger a surrender or re-grant of a lease depending on the circumstances. This is an important consideration because the new lease created may be considered a retail lease where it previously wasn't. If the new lease is a retail lease, then the rights and obligations of the landlord and tenant may be altered by the retail legislation.
Aitken Partners is committed to assisting you during this period We will remain accessible throughout the pandemic. If you need legal help please contact our Accredited Specialist in Commercial Tenancy Law, Sarah Ward on (03) 8600 6056 or sward@aitken.com.au.