This article was written by Chris Wheeler, Benita Ainsworth and Rhys Mitchell.
On 2 April 2020, the ACT Government released its preliminary agenda for relief that would be afforded to landlords and tenants of commercial tenancies in the wake of the COVID-19 pandemic.
In a statement on the same day, ACT Chief Minister, Andrew Barr MLA, announced relief would be implemented through the Covid-19 Emergency Response Act 2020 (Act) and the ACT Government's 'Economic Survival Tranche 2' (Stimulus Package).
The Act (which has been passed and is awaiting notification) introduces declaration making powers that allows the Minister to implement measures relevant to commercial tenancies in a quick and efficient manner as the current situation concerning COVID-19 evolves. This will enable the Minister to have far-reaching powers to make declarations regarding the enforcement and termination of commercial tenancies.
The theme from National Cabinet is to create a legislative environment for landlords and tenants to preserve their current relationships (i.e. by preventing terminations and evictions) and to work out an amicable solution that best serves their mutual interest.
In addition, the complementary Stimulus Package introduces a tiered category system to assist commercial landlords provide rent relief to business tenants. Landlords and tenants are encouraged to have open and constructive discussions regarding the rent relief arrangements which can be applied to their lease. Following an agreement between the parties, it is proposed that the landlord will make an application to the ACT Government for a waiver of commercial rates charged to the commercial property. The level of financial hardship the tenant's business is experiencing, will determine the relief afforded to the landlord for commercial rates. It is expected that the landlord will pass onto the tenant the rate relief granted by the ACT Government in a proportional cost-sharing arrangement.
This article will explore in further detail the initial measures introduced by the ACT Government through the Act and the Stimulus Package with a focus on commercial tenancies in the ACT. However, we anticipate further announcements will be forthcoming on this issue.
Agreed National Cabinet Principles
The ACT Government's response to relief for commercial tenancies has been spurred by the National Cabinet's broad principles to assist tenants and businesses to 'hibernate' during these difficult times.
The National Cabinet principles were announced by the Prime Minister on Sunday, 29 March 2020 and 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 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."
The above principles were intended to serve as a proposed guideline to the States and Territories, who in turn, will develop and implement their own measures in their respective jurisdictions.
The ACT Government's implementation of the National Cabinet principles is outlined below.
Covid 19 Emergency Response Act 2020
On 2 April 2020, the Act was passed by the ACT Legislative Assembly. Relevantly, the Act amends the Leases (Commercial and Retail) Act 2001 (ACT) (Leases Act), by prescribing in the Minister declaration making powers for 'certain matters' concerning commercial tenancies in response to the impacts of COVID-19.
The 'certain matters' include:
- "prohibiting the termination of a lease to which this Act applies for a lessor in stated circumstances;
- prohibiting the recovery of possession of premises under a lease by the lessor in stated circumstances;
- changing any period under the lease or this Act in which someone must or may do something;
- changing, limiting or preventing the exercise or enforcement of any other right of the lessor under the lease or this Act in stated circumstances;
- exempting a tenant or lessor, or class of tenant or lessor, from the operation of a provision of this act, a lease to which this Act applies or any other agreement relating to the lease of the premises."
Critically, there is the absence of the power to allow tenants to unilaterally terminate their leases.
To which commercial leases will a declaration apply?
The Minister has the power to make declarations regarding the enforcement and termination of commercial leases that are subject to the Leases Act. In the ACT, the Leases Act is applied broadly to retail and commercial premises, as well as leases to specified business and tenants (such as incorporated associations). The primary exemption applies to leases to a listed public company or a subsidiary of a listed public company for more than 1000m2. Most ACT office leases are captured by the Leases Act as well as more obvious retail leases.
It is therefore important that Landlords review their leasing documentation to determine whether their current tenancies are subject to the Leases Act and thus subject to declarations made by the Minister.
It is important to note that no guidance at this stage has been provided concerning the application of the Minister's declaration powers to multi-tenanted sites for example shopping centres or large commercial buildings. Further details are expected to be devised and announced by the ACT Government following the National Cabinet meetings.
How long is a Minister's declaration to apply for?
The relief scheme under the Act is intended to apply for the duration of the health crisis. The Act provides that a declaration will remain in force until:
- the day the Public Health (Emergency) Declaration 2020 (No 1) as extended or further extended, ends (currently these declarations are being extended in two day intervals in accordance with the Public Health Act 1997); or
- if the Minister considers that the effect of the COVID-19 pandemic justifies a later day, being a day not later than 3 months after the declaration end date.
What details will be included in a Minister declaration?
At the time of this article, the Act is awaiting formal notification and therefore, the legislation is pending but will commence imminently. As such, no declarations have been made by the Minister in connection with the enforcement and termination of commercial tenancies to date.
Further, there has been no guidance or material published to indicate the breadth and content such declarations may contain and the measures the Minister may seek to impose. The Property Council has approached the ACT Government to seek to work with them on their content.
ACT Government 'Economic Survival Tranche 2'
What relief is the ACT Government proposing for commercial tenancies?
The Stimulus Package prescribes a tiered category system to dictate the level of support that would be afforded to landlords (and passed onto tenants) by the ACT Government.
The tiered category system provides three broad categories which are:
- Category 1 – those who have been partially or not affected;
- Category 2 – those who have been significantly affected; and
- Category 3 - those who have had to shut-down operations due to COVID-19 health restrictions.
Who is eligible for relief?
If Category 1 applies, the tenant will still be required to pay rent in the usual manner prescribed by their lease. Therefore, no relief will be granted by the ACT Government to landlords. However, the ACT Government in its first economic stimulus package has already granted a fixed charge waiver (being a $2,622 rebate) to commercial property owners with an average unimproved value of less than $2 million.
For the purposes of Category 2, the Stimulus Package indicates that a business is 'significantly affected' if the income of the business has been reduced by at least 30%. If Category 2 applies, a landlord may make an application to the ACT Government to have their commercial rates waived (or rebated if paid annually). Any waiver that is granted by the ACT Government is to be passed onto the tenant. The Stimulus Package has provided a guideline that the proportional cost-sharing arrangement would be on a 25/75 basis the ACT Government will cap the amount available to landlords.
If Category 3 applies, the landlord will follow the same process as outlined in Category 2 above. However, the proportional cost-sharing arrangement would be on a 50/50 basis instead. The ACT Government will still impose a cap on the amount available to landlords.
At the time of this article, no system was available to be accessed on the ACT Revenue Office website to allow a landlord to make an application for commercial rates to be waived.
Do the relief measures apply to all leases?
What is not expressly stated is whether the relief measures apply to all properties with commercial tenancies or only those with leases subject to the application of the Leases Act.
It looks like the rates relief will not apply to vacant property (ie properties that did not have a leased business operating from them at the time of the health crisis).
It is anticipated that further guidance will be provided on this issue in the next round of announcements by the ACT Government.
What other measures were announced in the Stimulus Package?
The Stimulus Package also outlined that:
- Owner-operated commercial properties that have been significantly impacted by COVID-19 will also have access to the waiver and deferral arrangements (presumably by making an application to the ACT Revenue Office as outlined above, however, no further guidance has been provided). There is no need for these properties to apply for rental relief in order to be eligible.
- The ACT Revenue Office will allow rates to be deferred up to October 2020 (on an interest free basis) for commercial property owners that have been significantly affected by COVID-19. Affected commercial property owners will be required to make an online application through the ACT Revenue Office website (however, noting at the time of this article, no system was available to be accessed on the ACT Revenue Office website).
- The ACT Government will defer issuing commercial rates notices for 4 weeks from the usual timeframe for 4th quarter 2019-2020. Payment of commercial rates will not be payable until one month after the date the notice was issued.
- The ACT Government will appoint an 'Commercial Tenancy Mediator (Business Commissioner)' to assist landlords and tenants to engage and negotiate mutually agreeable relief arrangements.
So what's next
The policy landscape concerning commercial and residential tenancies is constantly changing by the day. As we await further and more complete details from the ACT Government and the National Cabinet on this matter, it is important for landlords and tenants to continue having open dialogue regarding the state of their business and whether any relief arrangements can be applied.
National Cabinet is working with industry on a proposed code of conduct to a set parameters around how the parties should be negotiating in these unprecedented times.
We will continue to help our clients deal with this difficult time and changing commercial and legal landscape. We will update you when there are further developments to share.