An update for landlords on COVID-19

On 29 March 2020, Prime Minister Scott Morrison released a National Cabinet Statement containing new short-term ‘hibernation’ measures to support commercial tenancies during the COVID-19 pandemic. Last week we wrote about various options available to landlords in the event that tenants fall into default on their rent as a result of COVID-19 and associated government mandated social distancing measures. Once implemented, these ‘hibernation’ measures will significantly reduce the options available to landlords.

New measures

As commercial and retail tenancies are regulated at the State and Territory level, each State and Territory will need to implement its own legislation to give effect to these ‘hibernation’ measures. However, the National Cabinet announced a ‘common set of principles’ that will guide the implementation of the new measures. They are as follows: 

• a short term, temporary moratorium on eviction for non-payment of rent to be applied across commercial tenancies impacted by severe rental distress due to COVID-19;
• tenants and landlords are encouraged to agree on rent relief or temporary amendments to the lease;
• the reduction or waiver of rental payment for a defined period for impacted tenants; 
• the ability for tenants to terminate leases and/or seek mediation or conciliation on the grounds of financial distress; 
• commercial property owners should ensure that any benefits received in respect of their properties should also benefit their tenants in proportion to the economic impact caused by COVID-19;
• landlords and tenants not significantly affected by COVID-19 are expected to honour their lease and rental agreements; and 
• 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.

Implications for landlords

Landlords will have to wait for more detailed guidance on exactly how these measures will be implemented by State and Territory governments. For example, it is currently unclear: 

1. what circumstances will give rise to ‘severe rental distress’, such that a landlord will be prohibited from evicting their tenant;
2. in what circumstances and for what period will rent be reduced or waived;
3. what circumstances will constitute ‘financial distress’ for the purpose of a tenant’s right to terminate a lease and/or seek mediation or conciliation;
4. what effect any pre-existing default may have on the application of the principles to each scenario; and
5. when the new measures will take effect and whether they will have any retrospective operation.

However, what is clear is that the new measures will limit the landlord’s rights in dealing with tenants who have been impacted by COVID-19.

An example from New South Wales

The New South Wales (NSW) Parliament passed legislation last week in relation to commercial and retail leases. The COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) (the Act) authorises new regulations to be made under the Agricultural Tenancies Act 1990 (NSW), the Retail Leases Act 1994 (NSW) and any other Act relating to the leasing of premises or land for commercial purposes. 

In certain circumstances¹,  regulations can be made under those Acts:

1. prohibiting the recovery of possession of premises by a lessor or owner of premises or land from a lessee or tenant of the premises or land under the relevant Act in particular circumstances;
2. prohibiting the termination of a lease or tenancy by a lessor or owner of premises or land under the relevant Act in particular circumstances;
3. regulating or preventing the exercise or enforcement of another right of a lessor or owner of premises or land under the relevant Act or an agreement relating to the premises or land in particular circumstances; and
4. exempting a lessee or tenant, or a class of lessees or tenants, from the operation of a provision of the relevant Act or any agreement relating to the leasing or licensing of premises or land.

However, the Act does not provide guidance on what ‘particular circumstances’ must occur before the regulations apply. 

At this stage, the NSW Government has not issued any regulations under the powers granted by the Act.

Relief from the banks 

Yesterday, the Australian Banking Association announced that Australian banks will allow businesses with total business loan facilities of up to $10 million the ability to defer their repayments for their business loans for six months. This is an increase from the previous $3 million threshold for small businesses. Businesses wishing to access this must opt-in and agree to certain conditions. 

Relevantly, for commercial property landlords, they must provide an undertaking to the bank that for the period of the interest capitalisation, they will not terminate leases or evict current tenants for rent arrears as a result of COVID-19² .

Moving forward

While awaiting the State and Territory Governments to implement the new measures, the Prime Minister has emphasised the need for open communication and cooperation between landlords, their tenants and banks, to help mitigate the long-term impacts of COVID-19. 

In the meantime, landlords should pay attention to any further clarification from the State and Territory Governments. It is expected that further updates will be provided throughout this week, so stay tuned for the next update.
 

 ^{1 Such regulations may only be made if the NSW Parliament is not likely to sit within two weeks after the day the regulations are made, and the Minister believes the regulations are reasonable to protect the health, safety and welfare of lessees or tenants under the Act. These regulations expire after six months, or earlier if decided by the NSW Parliament.}

^{2  In addition, the conditions also include requirements that interest is capitalised (meaning either the term of the loan is extended or payments are increased after the deferral period), the customer has advised that its business is affected by COVID-19 and the customer was current in terms of existing facilities 90 days prior to applying.}