Reform update: retail and commercial leases impacted by COVID-19

By Jane Baddeley, Natalie Bannister, Maurice Doria, Emily Kyriacou and David Dickens 

As of 30 March 2020, some states have passed legislation giving additional powers to the government in respect of retail and commercial leases. These powers have not yet been exercised.

Landlords of retail and commercial leases presently have their usual powers of termination and re-entry. On 29 March, the Prime Minister indicated the National Cabinet has agreed to impose a temporary moratorium for tenants impacted by COVID-19. This will be implemented soon and will significantly alter the rights between landlords and tenants.

Prime Minister’s announcement

On Sunday 29 March, the Prime Minister announced:

National Cabinet agreed to a moratorium on evictions over the next six months for commercial and residential tenancies in financial distress who are unable to meet their commitments due to the impact of coronavirus.

Commercial tenants, landlords and financial institutions are encouraged to sit down together to find a way through to ensure that businesses can survive and be there on the other side. As part of this, National Cabinet agreed to a common set of principles, endorsed by Treasurers, to underpin and govern intervention to aid commercial tenancies 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 coronavirus;
• 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 coronavirus;
• landlords and tenants not significantly affected by coronavirus 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.

What might the scheme look like?

The new measures will clearly include a moratorium on evictions. It may be along the lines of:

A landlord must not terminate a lease due to non-payment of rent by a tenant if the tenant’s ability to pay rent has been severely affected by COVID-19.

Having a provision only on the above lines does not alter the obligation to pay rent for each month during the COVID-19 crises – it just imposes a temporary moratorium on repayment. Once the moratorium ends, a landlord could threaten to re-enter unless all outstanding rent was paid. We expect the moratorium will be for six months with the possibility of an extension. It is not currently known when the moratorium will begin.

The bullet points above suggest the National Cabinet (or some states individually) will also consider:

1. Rent reduction/waiver. The challenge with such a measure is how to balance the interests of both the landlord and tenant. It does not seem likely that a rent reduction formula could be devised given the complexities. However, using a drafting technique such as imposing a ‘fair and just’ reduction gives no certainty or guidance. A softer approach would be to require the landlord to only genuinely consider any rent reduction sought by the tenant.
2. The right for a tenant to terminate a lease early and not have to pay damages, if the tenant’s business has been significantly impacted by COVID-19. This would need careful safeguards to ensure it is not improperly used by tenants seeking to exit long term commitments for reasons unrelated to COVID-19. Terminating a lease is permanent, in contrast to the other measures which are all temporary.
3. An obligation on landlords to pass on to tenants any government benefits received which relate to the property.
4. A broader moratorium that does not just prevent re-entry based on non-payment of rent. COVID-19 can affect a tenant’s other obligations under a lease such as being open for trade.

Our views

We think that landlords and tenants should engage in genuine dialogue to strike a balance. Their ability to do so will be helped if everyone else in the supply chain – from lenders through to customers – also adopt a similar mindset.

Today’s announcement by the Australian Banking Association, of the increased availability of six-month loan deferrals to now cover 98% of all business with a loan from an Australian bank, will help. Notably, commercial property landlords must undertake that during the deferral they will not terminate leases or evict current tenants for rent arrears as a result of COVID-19.

We support a targeted moratorium scheme for tenants severely affected by COVID-19. The scheme will be an important part, together with other recent measures such as directors being temporarily relieved of their duty to prevent insolvent trading, in allowing businesses to survive the COVID-19 crisis and quickly recover.

Ideally the scheme will be consistent Australia-wide and must also take into account landlords’ interests. Landlords range from mums and dads through to REIT investors and rent can be needed to fund living expenses and pay mortgages. Deferred principal and interest on loans still ultimately need to be repaid.

We are closely monitoring the National Cabinet’s statements regarding the scheme and will keep you updated.