Emergency measures for commercial leases take shape

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This article was written by Stuart Dixon-Smith, Carl Black, Chris WheelerMark Bayliss, Francesca Giorlando, Chris Mitchell and Tristan Howes.

As concerns continue to grow for the protection of tenants and the viability of many retailers and other businesses in the face of the COVID-19 pandemic, attention has shifted beyond immediate action to protect public health towards the preservation of certainty and confidence in the wider economy.

Whilst the Commonwealth's wage guarantee scheme has provided important relief for employers and employees, governments and banks are putting in place emergency measures to provide relief for tenants who are struggling to meet their rental obligations and landlords trapped between their mortgage obligations to financiers, ongoing rates and property taxes and reduced income streams from tenants. 

This article considers new moves to freeze the rights of landlords and tenants in respect of evictions and terminations, to extend bank loan deferrals and to encourage further negotiations to allow businesses to "hibernate" through the pandemic.

Agreed National Cabinet principles

On Sunday 29 March, the Prime Minister announced that the National Cabinet has resolved broad principles to help business "hibernate", to provide relief for tenants from the risk of eviction or termination and to encourage them to sit down with their landlords and financiers to ensure the survival of their businesses. The following shared principles were agreed:

  • "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."

These National Cabinet principles are not immediately binding. States and Territories will need to develop these principles in further detail and implement them in their respective jurisdictions. It is not yet clear whether these details will be uniform. It is quite possible that States and Territories will depart on selected issues from the National Cabinet position.

Key details to be confirmed include:

  • the scope of the moratoriums on evictions and terminations, whether tenants in default prior to the pandemic will be protected and if there will be exclusions for certain major tenancies;
  • on what basis tenants will be able to terminate their leases or seek conciliation or mediation. We share the concerns of many of the industry about the consistency of such proposals with the concept of hibernation and maintenance of confidence and certainty for business. Unilateral termination rights for tenants appear out of place where landlords are being required to forego their own termination rights; and
  • whether any abatements or waivers of rent will be mandated, and how they will relate to agreements struck between landlords and tenants directly. Whilst rent moratorium proposals have been put forward in several jurisdictions in the United States, other countries such as Italy have taken different approaches such as government directly subsiding commercial rents via tax credits.

In the meantime, we have seen two States move ahead of the National Cabinet in this area.

New South Wales and Tasmania move ahead with emergency legislation  

On 25 March, the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 received assent in New South Wales, giving Ministers limited powers to make new regulations under relevant acts in respect of:

  • prohibiting the recovery of possession of premises by landlords from tenants in particular circumstances;
  • prohibiting the termination of a lease in particular circumstances;
  • regulating or preventing the exercise of landlords' enforcement rights; and
  • exempting tenants or classes of tenants from the operation of provisions or agreements relating to their licensing or leasing of premises,

in limited circumstances to protect the health, safety and welfare of tenants or residents.  

The Act does not give detail around the measures to be implemented under these powers.  These provisions were originally moved by the cross bench rather than the Government, so there is no firm indication of whether, when and how the Government will use them. Further legislation for the National Cabinet principles is likely.

In Tasmania, the COVID-19 Disease Emergency (Miscellaneous Provisions) Act 2020 includes a right for a Minister to declare a notice in respect of certain commercial leases, prohibiting:

  • such leases from being terminated; or
  • rent increases,

in prescribed circumstances during an emergency period. There is no clear guidance as to what circumstances such prohibitions may apply and when the Tasmanian Government would exercise such powers. However, like the New South Wales legislation, those provisions may be amended or adapted to implement the National Cabinet principles.

Leasing conditions for bank loan deferrals

On Monday 30 March, the Australian Banking Association (ABA) announced that its six month loan deferral scheme for COVID-19 affected borrowers will be extended to borrowers with total business loan facilities up to $10 million. In return, it will be a condition of accessing the deferral scheme that benefitting landlords must undertake not to terminate leases or evict current tenants for rent arrears due to coronavirus impacts.

The ABA has also signalled that the deferral scheme may be made available to customers with total business facilities above $10 million on a discretionary case by case basis. Extending the scheme more broadly would be highly desirable for landlords and tenants. Whilst the ABA states that the package covers 90% of commercial landlords, it certainly does not cover the landlords of 90% of tenants given the closely held ownership of Australia's major retail shopping centres, large office complexes and business parks. In our view, the package should be extended to large landlords to assist them to help their many tenants, rather than disadvantaging tenants of large complexes and precincts.

What should landlords and tenants be prepared for?

While we await fuller details of the implementation of the National Cabinet principles and the ABA deferral scheme, landlords and tenants must exercise particular care around:

  • directly negotiating rental abatements, waivers or delays, noting that such arrangements may be superseded or made redundant by statutory arrangements;
  • securing appropriate relief from financiers, whether under the ABA deferral scheme or by direct negotiation; and
  • commencing or continuing enforcement proceedings against defaulting tenants, even if those defaults arose before the COVID-19 pandemic began.

We continue to help our clients deal with this difficult time and changing commercial and legal landscape and remain on hand to help our clients navigate this rapidly shifting environment. We will update you when there are further developments to share.

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