Should landlords and tenants wait for government relief in the time of COVID-19?
Prime Minister Scott Morrison announced on Sunday evening a series of principles relating to commercial and residential tenancies. Significantly, states and territories will be moving to put a moratorium on evictions of persons resulting from financial distress experienced as a result of the recent COVID-19 outbreak and legislation has already been prepared to put these measures into effect in New South Wales.
This moratorium will last for six months, with the Prime Minister calling for landlords and tenants to ‘sit down and, talk to each other and work this out’, also requesting banks assist parties in this venture.
In separate releases, much of the banking industry have announced loan relief measures allowing small businesses to defer their loans for a period of six months, with some banks going further to allow a pause on home loan repayments.
Other principles include:
- commercial property owners should ensure that any benefits received from their properties should also benefit their tenants in proportion to the economic impact caused by the COVID-19 (for example by not terminating distressed tenants when landlords themselves are deferring business loan repayments)
- landlords and tenants not significantly affected by COVID-19 are expected to honour their lease and rental agreements
- cost-sharing or deferral of losses between landlords and tenants, with Commonwealth, state and territory governments, local government and financial institutions to consider mechanisms to provide assistance.
While these measures may provide last resort protection measures, those persons and businesses affected by COVID-19 will have already examined the terms of their leases and will be unlikely to find the answers or mitigation measures that they are seeking.
It appears that at this stage, commercial landlords and tenants should not be waiting for further financial bail outs from the government. The parties to a lease engaged in negotiations when entering into the lease and it is time for landlords and tenants to engage with each other now to see if practical measures such as rent relief, rent reductions or rent holidays can be agreed now rather than abandoning leased premises or trying to negotiate a termination of the lease.
If you are only starting to think about this question now, we have set out below a brief analysis of the usual provisions of commercial leases and how they are likely to be applied in response to COVID-19. You should have specific consideration to the terms of your lease.
- Rent Abatement – Primary to the Government’s media announcement is the abatement, deferral or provision of rent relief during this time. The application of rent abatement clauses under a lease agreement will generally not be triggered as a result of the impacts of COVID-19. These provisions are expressed to apply when a Premises is damaged or destroyed or unusable in some other way. Despite this, following on from the Government comments, landlords and tenants may agree on a special abatement or other rent relief mechanism (such as a reduction in rent) while a tenant’s business is impacted by COVID-19. Additionally, landlords are expected to pass on the Government benefits it receives in response to COVID-19 to tenants during this same period.
- Termination – In addition to the moratorium on terminations, the Prime Minister announced his support for tenants to have the ability to terminate a lease or seek mediation or conciliation on the grounds of financial distress. Typically, termination rights arise under a lease where a party has been in breach of an essential term and generally favour the landlord. Where a tenant is unlikely to be able to meet their lease obligations due to the impact of COVID-19 on its operations, both tenants and landlords should consider seeking to enter into negotiations to reach a mutually agreed position. Parties should be watching for the legislative changes supporting this position, with New South Wales and Tasmania having already passed legislation. See our article on the New South Wales legislation that has been introduced.
- Compliance with Law and Rules – As the potential for greater shutdowns being imposed on business sites and workplaces grows, landlords will be looking to ensure compliance with emergency measures by tenants and occupiers of buildings. While authorities can enforce public health measures, landlords may also seek to enforce compliance through the obligations on tenants to comply with the laws of any authority relating to the use and occupation of the Premises within their lease. Likewise, landlords should be cautious in taking actions that could be seen as derogating from the tenant’s rights under the lease, such as breaching tenant’s quiet enjoyment or otherwise being substantially inconsistent with a right of the tenant under the lease (for example by requiring the tenant operate their business in a particular manner in order to receive rent relief).
- Access – Obligations around access to the buildings may also be relevant in light of potential closures of premises, as more businesses move to a 'work from home' model. Most leases include provisions dictating access to common areas and the premises for both the landlord and tenant. These provisions may include a right for a landlord to exclude persons from entry into the building for various reasons, such as non-compliance with the lease, a law or a rule introduced for the building.
- Infectious Diseases – Commercial leases may contain provisions that require a tenant to notify the landlord of any infectious disease occurring on the Premises as well as any other required authority. Where an inhabitant of the Premises is diagnosed to have or potentially have the COVID-19 virus, these provisions may require a tenant to notify the landlord of this fact. Landlords and tenants may further have:
- an obligation on tenants to abide by any instruction or request given by the required authority or landlord resulting from the notification
- an obligation on tenants to fumigate the premises should any infectious disease be found present
- an obligation on the landlord to ensure no breach of a law dealing with public health and safety occurs on the premises.
- Force Majeure – Where a party is prevented from performance of a contractual obligation due to an event outside their control, this may amount to a force majeure event and each party is excused from performance of its contractual obligations. Typically this captures an industrial dispute or an 'act of God', but force majeure clauses are less commonly included in leases and generally do not extend to events such as a pandemic. If force majeure clauses are included, this clause should be individually examined to best understand the rights it confers on the tenant and landlord.
The Prime Minister also announced on 27 March 2020 that amendments to other legislation and policy are potentially being considered to provide for councils to waive rates, and provide relief from land tax to those impacted by COVID-19. This is an essential element of landlords and tenants successfully navigating their way through this crisis.
As the COVID-19 situation continues to unfold, we will likely see continued government rules and regulations impacting commercial leases and residential tenancy agreements nationwide. Now more than ever, landlords and tenants should be individually reviewing their leases and Residential Tenancy Agreements to better understand their specific rights and obligations and engage with the other party sooner rather than waiting until the rent is not paid. A link to the government's media release can be found here: https://www.pm.gov.au/media/national-cabinet-statement.
Maddocks has produced guides to a range of legal issues raised by the coronavirus (COVID-19). You can access these guides here.
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