Following our previous update on the escalating COVID-19 situation in the commercial lease context, the Prime Minister has just announced a 6 month moratorium on termination of commercial and residential tenancies for non-payment of rent.
There have also been additional reports today that Banks will allow commercial landlords with loans of up to $10 million to delay their loan repayments by up to six months, on the condition tenants are not evicted due to the coronavirus crisis.
Mr Morrison says:
- States and Territories will be implementing a six-month ban on evictions of people as a “result of financial distress if they are unable to meet their commitments”; and
- He wants landlords and tenants to work with each other and banks while the policy is worked on. “We want people to sit down and work this out … There is no rule book for this,” he says.
The term “commercial”, presumably, also includes retail leases.
It is not clear at this stage when the moratorium will start, but 1 April 2020 is a logical start date.
It is also not clear how ‘financial distress’ or a tenant’s ability to ‘meet their commitments’ will be defined or assessed. This will no doubt be fleshed out in the wording of the new legislation.
Whilst a 6 month ban on any evictions offers a critical life line to tenants, the new measures do not relieve tenants of their obligation to pay rent and outgoings in full during the entire term of the lease, including during the moratorium period.
As a result, if the lease terms are not renegotiated and properly documented by the end of the moratorium period, the new measures will serve to only delay the inevitable (and potentially exacerbate the tenant’s cash flow problems at that time) if it does not pay all unpaid rent in one hit at the end of the moratorium period.
Landlords and banks are effectively being asked to carry the burden of the crisis during the moratorium period.
In light of the above announcement, here are our top tips for both commercial and retail landlord and tenants as well as matters to consider:
- Seek to renegotiate the terms of your existing lease to include a rent abatement or reduction clause for an agreed period of time, but be careful about what you ask for.
You should ensure you carefully consider what sort of relief you’re asking for as there can be a material difference between a rental abatement, meaning the rent is not payable for a period, and a rental deferral, meaning the rent for a period remains payable, but at a later date. You should also ensure any agreement is properly documented and sets out what happens at the end of any rent abatement or reduction period, or at the end of the statutory moratorium period. A properly drafted lease variation agreement avoids ambiguity and disputes in the future and may be required to be produced to financiers and future assignees of the lease.
- Check if your lease has a “force majeure” clause.
A “force majeure” clause operates to exclude liability where a party’s failure to perform its obligations under the contract is caused by unforeseen circumstances. Generally speaking, “force majeure” clauses are not common in lease but if your lease has one, this may be the easiest way to avoid your ongoing obligations under your lease, if doings so is commercially your only option.
- No “force majeure” clause – look to the doctrine of frustration.
In the absence of a “force majeure” clause, the common law doctrine of frustration may in limited circumstances be able to be relied upon as basis for terminating the lease. There is an extensive body of law that relates to the doctrine of frustration and the consensus is that it can be difficult to establish.
In the case of COVID-19, however, the orders imposed by the government may prohibit the conduct of the permitted use which may be cause for the lease to be frustrated.
The specific circumstances of each case should be considered and parties should seek advice in relation to whether the lease is frustrated and whether or not termination of the lease is desirable.
- Carefully consider the impact of any rent abatement or reduction request prior to agreeing to any variation to the lease and consider its impact on your mortgage.
You should ensure any lease variation agreement is properly documented and sets out in clear terms what happens during, and at the end of, any rent abatement or reduction period, or at the end of the statutory moratorium period. Importantly, you should obtain legal advice to ensure you avoid inadvertently waiving your rights under the lease to receive rent and outgoings at the end of the moratorium period on account of any decision you make now (on compassionate or commercial grounds) to not exercise your rights when the tenant is in breach of the lease.
You should also consider the impact of any agreement reached with the tenant has on your mortgage over the premises as any variation to the lease, including a significant rent reduction, may technically trigger a default under your loan if the variation is not consented to by the mortgagee. Although in the current environment financiers are likely to be more flexible around these issues, it is important to remember that the COVID-19 crisis is only temporary and, at some point, lease variations that limit the landlord’s rights or its income entitlements will need to be brought into account, including for valuation purposes.
A properly drafted lease variation agreement avoids ambiguity and disputes in the future and may be required to be produced to financiers and future purchasers of the premises.
- Security deposits and further security.
Consider what your leases says about the security deposit and how this can be accessed. Further, if you are considering agreeing to a rent abatement or reduction, think about asking for further security in exchange for grating that relief to protect your right to receive rental after the rental abatement period ends. This could be particularly important if the tenant is placed under any form of external administration in the future. For example, requesting a GSA over the assets of the tenant or a charge over property of the tenant or a guarantor of the tenant. You should obtain legal advice in relation to such security and your rights under it.
- Do you want a vacant premises in the face of this epidemic?
Although you may choose to be compassionate towards your tenant’s position and their requests for a rent reduction or abatement in this current environment, you may also be concerned about your personal situation and if you can afford to not have your usual rental income.
Despite the above, it is worth considering whether having a vacant premises in these times, as well as entering into negotiations in an unfavourable market, both now and following the COVID-19 crisis, is wise.
Whether you are a tenant or a landlord, if you are seeking assistance as to how to best proceed in this uncertain environment please contact us on (03) 9614 7707.