Rental Guarantee and Covid – 19

Due to the Covid-19 pandemic in worldwide, the property market in Australia has suffered extended impacts in relation to the market value of the properties and investment return rate.

One of the concerns that many purchasers might have is about the rental guarantee, which is a document signed both by vendor and purchaser indicating that the vendor will guarantee specific rent return after the commencement of the rental guarantee agreement.

We have been recently asked whether the vendor/developer must fulfil its obligations under the rental guarantee in the current Covid-19 situation and what if the vendor/developer fails to fulfil its obligation or refuses to fulfil its obligations by arguing Covid-19.

As different rental guarantee agreement or deed may have different clauses, we cannot provide specific legal advice to you unless we can have your agreement. However, depending on the terms of the rental guarantee agreement, so long as you as a purchaser fulfilled all your obligations under the Property Purchase Contract and rental guarantee agreement, it appears that it is really hard for the vendor/developer to argue that it does not need to fulfil its obligations by providing guaranteed rent return. We have explained two possible arguments that the vendor might have as a defence for breaching the rental guarantee agreement with you.

Possible argument 1 – Force Majeure

Force Majeure is a legal concept designed to provide relief to parties affected by an unavoidable or unforeseeable event. Normally, the force majeure can be understood to include the “acts of God”, “natural disasters”, “government action or interference”, “national emergencies”, and “acts of wars”.

In Australian common law jurisdiction, force majeure is “solely a creature of contract” and is a “product of contractual negotiations”, that is, force majeure can only be applied when it is regulated and agreed in your rental guarantee agreement.

Assuming that a force majeure clause is agreed, which normally in practice not, then the vendor/developer can potentially argue under current Covid-19 situation they do not need to pay you the guaranteed rent.

However, you need to note that even if the vendor has such a defence or argument, the clause itself needs to be examined whether the definition includes the terms such as infectious disease, pandemic or similar; secondly, the contractual obligation affected; and thirdly the affected obligation needs to be examined whether the obligation cannot be performed or the performance is merely an inconvenience or further/extra finance required;

You as the purchaser needs to bear in mind that the party who argues for force majeure bears the burden of proof and that whether the payment of the guaranteed rent is truly prevented or rendered impossible or it is just merely more expensive.

Possible argument 2 – Frustration of the Contract/Agreement

If the rental guarantee agreement does not contain a force majeure clause, then the vendor/developer might argue the doctrine of frustration.

Frustration is a common law concept. It says in a frustrating event without the faulty of either party, the obligations of either party under the agreement becomes incapable of being performed “because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract” (Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 AT 729).

If the doctrine of frustration is argued, then the event caused the frustration needs to cause a “radical change”, that is under the Covid-19 situation, the pandemic has caused a radical change in terms of the obligations of the vendor under the rental guarantee agreement.

In order to demonstrate the radical change, the following factors needs to be considered:

  1. Whether further performance of the obligation under the Agreement is substantially different from what was agreed;
  2. Whether the event creates a fundamentally different situation compared with the original situation when the Agreement was executed and dated;
  3. Whether the further performance of the obligation under the Agreement will substantially deprive the whole benefit of the Agreement of that party which was the intention of the parties as expressed in the Agreement.

Having said that, we do suggest you consider your matter in detail and in a case by case manner with us.

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