COVID-19: Managing leases
COVID-19 is profoundly impacting businesses. It’s a daunting time for landlords and tenants alike facing the unprecedented impact on their lease arrangements. Below we set out the current state of play: note it’s a dynamic situation and we expect more guidance soon.
National Cabinet response
On 29 March 2020 the National Cabinet introduced a statement of principles (National Principles) that relate to commercial and residential tenancies.
These principles are:
- 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.
National Cabinet is not a law making body, and these National Principles are not law. Rather, they are designed to encourage landlords and tenants to sit down with each other and to agree on temporary amendments to their leases.There is also little detail in the National Principles.
The Prime Minister has suggested that the Principles will be made into mandatory rules in the next week (beginning 6 April)
NSW Government response
In NSW, the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (Emergency Measures Act) empowers the Government to regulate residential and retail tenancies that are affected by COVID-19. These changes allow the NSW Government to make regulations that:
- prohibit a landlord from repossessing the premises (evicting the tenant);
- prohibit a landlord from terminating a lease;
- regulate or prevent a landlord from exercising their rights under the lease;
- exempt a tenant from the operation of relevant legislation
Although the Emergency Measures Act establishes broad powers to make regulations, at this point in time no regulations have been made under them. It is unclear if and when the regulations will be made.
So what next?
We recommend sitting tight until the National Principles are made into law or the NSW Government makes new regulations. It would be risky to take action (for example terminate a lease) on the basis of the foreshadowed protection under the National Principles. In the meantime, the Principles could be used as guidelines for negotiating with your landlord or tenant.
Reducing, waiving or deferring rent
Where you are negotiating for a reduction, waiver or deferral or rent, there a number of matters to consider:
- are you passing on any relief that you receive; eg, tax or loan relief? The Principles suggest that this will be required.
- what is being reduced, waived or deferred; eg, does it include outgoings?
- how long is the reduction, waiver or deferral?
- can the reduction, waiver or deferral be terminated early?
- for a deferral, when will the rent arrears need to be paid?
- Is there a quid pro quo – for example, the reduction, deferral or waiver may be in exchange for: the tenant entering longer lease; increased rent over the term of the lease (once the concessional period is over)
Where you can negotiate an arrangement, it should be properly recorded in a deed between the parties covering all the details of the arrangement. The deed should also cover whether the arrangement will be impacted by any mandatory rules / legislation that is passed. Note that if your lease is registered, the arrangements should be registered as a variation. Contact us for assistance preparing the deed and registering variations.
For landlords, good tenants will be good tenants again and it is in your interest to negotiate an arrangement that keeps the tenant in your property rather than rolling the dice on a new tenant. Where it is not possible to negotiate, you should get legal advice before looking at termination of a lease.
For tenants, if you’re unable to pay the rent or otherwise meet the terms of your lease, you need to seek to negotiate an arrangement. If you don’t, you will be in breach of your lease. At present, and until mandatory rules / legislation is passed, this may entitle your landlord to evict you and and/or sue you for damages. It’s unclear at this stage how the force majeure and frustration doctrines will apply in light of the COVID-19 pandemic.
When negotiating an arrangement with your landlord, come to the table willing and ready to explain and demonstrate the impact on COVID-19 on your business and your ability to comply with the lease. Be prepared to show your landlord your financial records, with an appropriate undertaking of confidentiality.
As the COVID-19 pandemic continues to unfold we will see new rules and regulations rolled out that will have an impact on commercial leases and residential tenancy agreements. During these unprecedented times, it is important for all parties to work together. The message to landlords and tenants is be proactive and negotiate in good faith, but also be open minded, transparent and reasonable.