With the impacts of Coronavirus beginning to set in, Australian property investors who own residential property have been told not to evict tenants who can’t pay their rent, while commercial landlords have been told to come to an arrangement with their tenants.
Advisers are recommending that landlords need to be flexible but they also need to check their leases and formally document any arrangements they come to.
Property’s new “Principles”?
Last week, Prime Minister Scott Morrison provided an update on the latest initiatives of the National Cabinet, announcing a series of “principles” covering commercial and residential tenancies.
Morrison said the states and territories will put in place a moratorium on evictions of persons who are unable to pay their rent as a result of financial distress. The moratorium will last six months.
On the commercial side, the Prime Minister said he urged tenants and landlords to “sit down, talk to each other and work this out. We need landlords and tenants to come up with arrangements that enable them to get through this crisis so on the other side the landlord has a tenant, which is a business that can pay rent, and the business is a business that can re-emerge on the other side of this and be able to go on and employ people.”
“We will be working on measures that will be encouraging you to do just that and support you to do just that. There is no rulebook for this, we are in uncharted territory, but the goal should be shared.”
First steps for investors
Legal advisers say property investors, especially those who own commercial or retail property, need to be familiar with their rights and obligations in relation to COVID-19. They need to consider how they would structure a rent holiday or deferral, and they need to check their insurance policies.
Advisers say the first step for property investors is to review their leases to get a clear picture of their rights and obligations, and the rights and obligations of their tenants.
The Victorian Government has announced rent relief for commercial tenants in government buildings and is encouraging private landlords to follow its example.
In a note to clients, law firm Hall & Wilcox says: “If a tenant elects to close its business, even if the landlord waives an obligation to trade, it is most likely that rent will still be payable under the terms of the lease.”
“Practically speaking though, there will have to be some commercial resolution to the issue of rent payments to avoid significant numbers of businesses failing permanently as a result of this COVID-19 crisis.”
“Some options to consider are the grant of a temporary rent holiday, with the balance of the waives rent added to resumed payments over the balance of the term; reduced building operations costs if the space is not being used; and converting base rent payments under a retail lease to turnover-only rent. Leases will require formal variation to give effect to these changes.”
Law firm Piper Alderman says: “There is usually no requirement in a lease for a landlord to grant rent relief or a rent holiday to a tenant. However, landlords may decide to grant relief. Given the circumstances, it may be better to help the tenant than face vacant premises.”
“In such cases, it is important that the terms of the rent holiday or relief be properly documented. It is important to establish from the outset when, if ever, the discounted rent is to be repaid.”
Holding Redlich says: “How to deal with tenants in financial distress is ultimately a commercial question. What is certain is that this question will arise and landlords will have to consider rent waivers and suspensions.”
“It is very important to make sure any arrangements are clearly documented so that there is no doubt such things as whether the waiver of a deferral or absolute, whether interest applies and other repayment terms.”
Landlords: be familiar with your disease controls
On other matters, Holding Redlich says property investors should be familiar with their obligations regarding notification of diseases in the property, powers and duties about controlling access, and cleaning and maintenance obligations.
“There may be a need to screen access to a building to minimise the risk of infected people entering. Do you have the right to exclude people or temporarily shut the premises?”
“If you have the right to exclude people, can it be exercised at your discretion or only if there is a government order? Does that right apply only to visitors or does it extend to tenants?”
Holding Redlich says the owner of private property is entitled to use temperature scanners and other methods to screen access to the building. “The landlord is in possession of the common areas,” it says.
“Do you owe a duty to tour tenants to try and screen access to the building, and do you have a duty to notify your tenants of a positive COVID-19 test in a building? We think it is reasonably likely that such an obligation will be implied in leases for buildings with multiple tenancies”
Piper Alderman says that when it comes to the obligations of tenants, leases usually impose on the tenant an obligation to immediately notify the landlord of any infectious diseases in the building.
“A tenant may be in default under the lease if they do not advise the landlord of the infectious disease. We recommend tenants notify the landlord of infectious diseases on the premises even if the lease does not include an obligation to do so.
“Similarly, we recommend landlords notify other tenants in the building if they are aware a person with COVID-19 has entered the building.”
On the issue of cleaning, Piper Alderman says the standard and frequency of cleaning is not usually stipulated in a lease. If a landlord considers that additional cleaning is required due to COVID-19, it may increase the standard or frequency of cleaning and may pass these costs on to the tenant as part of outgoings.
“The recoverability of a landlord’s costs will be subject to any tenant negotiated outgoings cap or specified exclusions.”
Piper Alderman also recommends that property owners confirm with their insurers whether their insurance policy covers claims arising due to COVID-19.
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