Insights

Having faith in good faith

Real Estate & Projects

Over the last month landlords and tenants have been grappling with their responses to the impact of COVID-19 on tenants' financial obligations under leases.

Last week, in foreshadowing the mandatory code that is due to be released soon and possibly as early as tomorrow, the Prime Minister said that he wanted landlords and tenants to negotiate in "good faith" on issues including appropriate rent relief for tenants. Each State and Territory will need to implement its own legislation to reflect the principles that will be announced in the mandatory code.

The Prime Minister's language raises the prospect of significant developments in the common law area of good faith in commercial leases.

Where parties to leases captured by the mandatory code cannot agree on rent relief, they are expected to be obliged to undertake mediation. It is not yet clear whether that mediation:

  • is intended to be binding, but if so, it may be assumed that mediators will be applying principles of good faith to their determinations; and
  • is not intended to be binding, but if not, when no mediated settlement is reached and parties subsequently litigate, it is not unreasonable to expect presiding judges to be heavily influenced by good faith principles.

The mandatory code will only apply to certain leases. This will leave many tenants attempting to negotiate directly with landlords on rent relief, both on the interpretation of the lease itself (which most likely will not include a general good faith obligation), and the code. While parties may not be obliged (whether under their leases or under legislation) to vary their lease terms, the unprecedented mix of mandated closures of buildings, tenants reducing or stopping rent payments without approval and a moratorium on tenant evictions because of non-payment of rent raise the prospect of significant future litigation volumes and more expansive interpretations of the doctrine of good faith.

In these unprecedented times, will a broader doctrine of good faith develop, and will the courts be prepared to read a general principle of good faith into commercial contracts? Could the remarkable turmoil the market is currently experiencing form the foundation for the evolution of the good faith doctrine to a point where:

  • a party could be obliged to act contrary to its best interests (in this example, a landlord having to agree to grant a tenant rent relief); or
  • a party could be obliged to comply with standards of conduct that are held to be reasonable having regard to the interests of the other party?

Either outcome would be a revolutionary step in the law of contracts.

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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