UPDATE: commercial leases in the wake of COVID-19

Written by Catherine Micallef

This article provides an update to landlords and tenants of commercial leases as to the legislative and regulatory changes arising from COVID-19.

*This information is accurate as of 9.00 am Wednesday 8 April 2020 (local AEST time) and is subject to change as this situation evolves.

As you may be aware, the Prime Minister spoke yesterday in relation to the National Cabinet’s plan regarding commercial leases. The Government advice is that landlords and tenants should work together to reach a reasonable position on rental payments to ensure that all businesses can survive this period.

Laws regarding commercial leases are a State matter, meaning that any decision put forward by the National Cabinet must be then be adopted and implemented by the Victorian Government before it is enforceable.

To date, the Victorian Government has not passed any legislation regarding commercial leases.

However, based on the National Cabinet’s announcements we provide a summary of the principles which are likely to be legislated in the coming weeks:

1. Moratorium on evictions

On 29 March 2020, the National Cabinet agreed to implement a 6 month moratorium on evictions of commercial (and residential) tenancies who have been financially affected and unable to meet their lease obligations due to the impact of COVID-19. This is not yet law in Victoria.

The moratorium will prohibit a landlord from evicting a tenant, on the basis that the tenant has failed to pay rent.

This moratorium only applies where the failure to pay rent is caused by COVID-19. Both landlords and tenants who have not been significantly affected by COVID-19 are expected to honour their lease agreements as usual.

2. Mandatory Code of Conduct

On 3 April 2020 and 7 April 2020, the National Cabinet announced the plan to develop a mandatory code of conduct for commercial tenancies, guided by certain principles, which will then be legislated at the State level.

The code of conduct is to apply, where the landlord OR tenant is:

(a) Eligible for the Commonwealth Government JobKeeper payment program; and

(b) A small or medium sized enterprise (that is has less than $50 million annual turnover).

Some of the principles that will guide the code, will be as follows:

• Where rent can be paid, a tenant should continue to do so, where there is financial distress from COVID-19 and the tenant is eligible for the JobKeeper program, the parties should negotiate a mutually agreed resolution.

• When a rent reduction is considered, it should be proportionally based on the decline in turnover to allow the burden to be shared between the parties.

• There will be a freeze on rental increases (save for turnover leases).

• There will be a prohibition on penalties for tenants who stop trading or reduce trading hours.

• There will be a prohibition on landlords passing land tax to tenants (if applicable).

• There will be a prohibition on landlords charging the tenant interest on unpaid rent.

• There will be a prohibition on landlords calling on bank guarantees and security deposits for the non-payment of rent.

• Any legislative or administrative barriers to lease extensions are removed, so that the parties could agree on a rent waiver in return to a lease extension.

• In the event there is a rental reduction of 50% or more agreed, a tenant is entitled to at least 12 months to repay this sum, even if this means extending the loan term.

3. Land tax waiver and deferral

For parties that sign up the code of conduct, States and Territories have agreed to look at providing the equivalent of at least a three-month land tax waiver and three-month land tax deferral on the application for eligible landowners, with jurisdictions to continue to monitor the situation.

If granted, landlords must pass on the benefits of such waiver/deferral to tenants.

4. Mediation

The States and Territories will arrange for binding mediation process available, if required.

5. Banks

If applicable, both tenants and landlords should reach out to banks and lenders, who will provide support in respect of leasing arrangements.