Force majeure is a legal principle where unforeseen circumstances prevent a party from fulfilling obligations under a contract. Protection under the principle is only granted if the contract or lease includes a force majeure clause.
Force majeure clauses are not common in leases and virtually unheard of in an Agreement to lease.
If the lease does include a force majeure clause, the applicability of the clause will turn on whether the COVID-19 pandemic falls within the scope of a force majeure event.
If due to government regulation it classifies the pandemic as a national emergency, at that time the clause may become applicable subject to the wording of the clause.
If the lease or agreement does not have a force majeure clause then the other principle a party may be entitled to rely on is the common law principle of “Frustration”.
This occurs when the obligations under a contract or lease cannot be completed due to unforeseen circumstances or an uncontrollable event. If the lease is frustrated, it is terminated, and each party is released from its obligations under the lease.
There is an extensive body of law that relates to the doctrine of frustration and it is often a misunderstood concept. It is a difficult principle to rely on and often misunderstood.
The principle cannot be relied on where:
- there is a force majeure clause in the contract that applies to the uncontrollable event.
- the party is merely suffering an unforeseen loss or the burden for it to perform its obligations has increased; or
- a delay in being able to perform an obligation under the contract (that is not an unreasonable delay).
Where a resident moved out of their home for 10 days to comply with an isolation order from the government, the Court held that the interruption did not frustrate the lease because it was not expected to last for the term of the lease or for a long period of that unexpired term.
There is no case on this point in Australia and recently, the High Court of England and Wales found that Brexit was not sufficient to frustrate a lease as the tenant could continue to lease the premises (even though under less-desirable circumstances).
In the case of COVID-19, the orders imposed by the government may prohibit the conduct of the permitted use under the lease which may be cause the lease to be frustrated however it remains untested and depends on the circumstances .
The payment of rent is a material term of a lease and failure to pay, gives the Landlord the automatic right to terminate the lease and re-enter the premises if the non-payment extends for 14 days after notice is provided.
It may be a better option for both parties to enter into discussions as to a rent abatement or reduction for a period of time.
Any agreed rental reduction should be documented to avoid a tenant later arguing the landlord is “estopped” from enforcing the rent determined under the lease at a later time.
Leases require tenants to comply with any applicable laws, requirements, regulations or orders made by an applicable authority and a failure to comply with the government (whether federal or state) can be the basis of a breach of the lease.
Landlords and tenants should review their insurance policies to determine whether their losses are covered in cases of pandemics.
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