Commercial impact of COVID 19 is far from certain and it has already created challenges for landlords and tenants given the extensive lock down measures imposed by States and Territories. Even though things are set to settle in the coming few weeks, landlords in particular are facing a range of issues including reduced office occupancy, business continuity concerns etc. Under such circumstances it is vital that landlords understand how to navigate concerns raised by their respective tenants. This blog article will attempt to answer some common questions raised by landlords and tenants pertaining to their rights and liabilities under lease agreements and how the general position pertaining to leases have been affected by the National Code of Conduct released by the National Cabinet.
Is it possible for a tenant to suspend payment of rent and other ancillary fees payable under a lease during the Covid – 19 pandemic?
Generally under a lease agreement, tenants will continue to be bound to pay rent despite them not being able to use the premises during the period of closure. However, it should be noted that whether a tenant is entitled to rent abatement, or any other concession will largely depend on the exact wording of the lease agreement. Nevertheless, even if a lease provides for a right to suspend or abate rent payment, this will invariably be applicable in a situation where premises cannot be used or accessed due to some damage or destruction to the building or premises. Typically, leases do not include rent payment exemptions in circumstances other than where the use of premises is affected by actual damage to the premises. Therefore, it is unlikely that a tenant will be exempted or will be able to abate rent during the Covid 19 pandemic.
However, as per the leasing principles set out under the National Code of Conduct, the above position may not be equally applicable for all tenants
What happens if a tenant stops or abates rent payments?
Non-payment of rent is generally considered as a breach of an essential term of a lease which entitles a landlord to re-enter the premises and terminate the lease or alternatively bring an action against the tenant for damages. However, considering the unprecedented nature and the impact of Covid 19, it would be prudent for landlords to explore more plausible options including reaching a commercial arrangement or a payment plan on payment of rent.
In the event where a landlord terminates the lease, a tenant has the option of seeking relief against forfeiture by making an application to the Courts. The Courts can grant relief if it can be demonstrated that the breach which lead to termination has not been consistent breach and that the tenant is able to continue to comply with the lease terms.
However, after the National Cabinet released its National Code of Conduct on 7th April 2020 which is set to govern commercial, industrial and retail tenancies affected due to the pandemic, the above position has changed substantially.
The Code is applicable to all tenants who are suffering from financial hardship that:
- have an annual turnover of up to $50 million; and
- are an eligible business for the purpose of the Commonwealth Government’s JobKeeper program. For these tenants, assuming they are not charities, this means that the business has lost 30% or more of their revenue compared to a comparable period a year ago.
The Code will come into effect on a date defined by each State or Territory and will be in force for the “the period during which the Commonwealth JobKeeper program remains operational” As per the principles set out in the Code,
- tenants will not be evicted due to non-payment of rent during the pandemic period and landlords must not terminate leases due to non-payment of rent during the pandemic period
- tenants will have the benefit of: (a) proportionate reductions in rent payable in the form of waivers (being rent abatement) and deferrals of rent of up to 100% of the rent payable, based on the reduction in the tenant’s trade; (b)rental waivers (rent abatement) must constitute a minimum of 50% of the total reduction in rent payable over the pandemic period and should constitute a greater proportion of the total reduction in rent payable where failure to do so would compromise the tenant’s capacity to fulfill their ongoing obligations under the lease;
- if rent is deferred, payment of the deferred rent must be amortized over the balance of the lease term or a period of no less than 24 months, whichever is greater (unless otherwise agreed). Repayment of deferred amounts cannot commence until the earlier of the pandemic end date (as determined by the Australian Government) or the existing lease expiring. Repayments should occur over an extended period to avoid placing undue pressure on tenants;
- no fees, interest or other charges may be applied in respect of rent waived, nor any fees, charges or punitive interest may be charged on deferrals;
- for retail tenants, landlords may not apply any prohibition or levy penalties if the tenant reduces opening hours or ceases to trade during the COVID-19 pandemic; and where appropriate, waiver of an expense or outgoing payable for the period the tenant is unable to trade.
- if there is a reduction in statutory charges such as land tax and council rates, or insurance, that reduction must be passed onto the tenant in the appropriate proportion;
- landlords must freeze any rent increases until the pandemic is over (excluding retail tenancies where rental is calculated pursuant to turnover rent);
- landlords should seek to share any benefits received due to the deferral of loan payments provided by a financial institution as part of the Australian Banker’s Association’s COVID-19 response.
- landlords must not draw on tenants’ security for the non-payment of rent during the pandemic period and/ or a reasonable subsequent recovery period.
- landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant during the period the tenant is not able to trade;
Although there is lack of clarity surrounding the extent and the application of certain principles, the ultimate application of the said principles will largely depend on the relevant legislation that will be enacted by States and Territories. However, it is certain that appropriate measures have been taken to protect the interest of both tenants and landlords.