COVID-19 – Practical Solutions for landlords and tenants (Part 3)

Giancarlo Romano
6 April 2020

The COVID-19 health crisis has escalated quickly into an unprecedented economic crisis. Government intervention is anticipated but to date is yet to put to rest many of the legal issues faced by landlords and tenants. Until any new legislation is announced that will better define the rights and responsibilities of landlords and tenants this article discusses some of the practical solutions for landlords and tenants to consider to help them through this period of uncertainty.

Practical Solutions

Assistance Available

The majority of financial assistance available to date is being aimed at tenants, with only some reprieves potentially available to landlords at present. For this reason, tenants that may be experiencing hardship in paying their rent are encouraged to speak firstly with their accountants to determine what assistance packages they may qualify for before going to their landlords for assistance. Part 2 of our trilogy may assist in guiding tenants through this process.

Insurance Coverages

Most leases obligate a tenant to take out business interruption insurance and Landlords will often have their own loss of rent insurance policy. Every policy wording is different; so in this present time of uncertainty, both parties are urged firstly to review their policies in detail to ascertain whether loss of rents/business interruption losses may be recoverable. In the authors’ opinion, this will be important also for both parties when attempting to negotiate some form of rental abatement.

Adapting Your Business or Use of Premises (Planning Considerations)

As restaurants and cafes are now restricted only to takeaway trade (and closing their doors entirely may be a breach of the lease as discussed above), many of them are continuing to trade as take-away only. It is important for these stores to have a take-away food licence as the penalties and legal liability in this area can be devastating for small business. Other restaurants are immediately responding to the restrictions by converting their businesses into convenience stores; keeping their employees in work, their suppliers in business and making perishable food stocks available to the public – a win-win solution it seems for now. Such re-purposing of a premises may be in breach of the lease terms which ordinarily specify a strict permitted use so it is important for tenants to do so with the prior knowledge and consent of their landlord.

For landlords and tenants alike; consideration should also be given to the relevant Council licensing and any planning restrictions that may regulate such activities. Such repurposing may require fresh permit applications to Council which our planning team are readily available to advise on and to expedite. It remains to be seen whether any Councils would take enforcement during these unprecedented times; whilst we would not expect any such action in the short term we note that the objectives in regulating such activities for the community benefit are unchanged.

Rent Abatement Negotiations

The first knee-jerk reaction of most tenants when faced with possible forced closures is to reach out to landlords to request a total rent abatement. Most landlords however (with their own obligations, pressures and concerns) would not willingly bear the entire financial burden presented by the circumstances and are not really in a position to consider any such request without knowing how long this crisis is going to last and what other Government restrictions/assistance was around the corner.

Whilst it is important to maintain open communication and raise concerns between a tenant and landlord, in our experience a tenant is far more successful with such requests if they can show they have investigated and/or exhausted all other avenues available (as outlined above). Tenants are encouraged to write to landlords with details and evidence of the following:

• why the tenant’s business is affected by the COVID-19 outbreak (this should include financial statements comparing the past two financial years and monthly turnover figures);
• what current arrears of rent or outgoings they are experiencing under the lease;
• what practical attempts the tenant has made to mitigate the impact of Covid-19 on its business (eg. change of use/amending trading hours)
  what applications they have made or received for Government assistance; and
• whether they have claimed or are able to claim any insurance under their current policy.

It is obvious that a commercial resolution will be required for tenants to avoid permanent closures of businesses and landlords to be left with vacant shops premises. For landlords it would be better to have a sustainable drop in income temporarily than to have to find new tenants in the current economic climate. Some rent abatement options to consider are:

• A rental abatement for a fixed time period with the value of the waived base rental added to ordinary future payments over the balance of the term once the business is trading again successfully (eg. 50% base rental reduction for 6 months; this results in the tenant owing three months’ worth of rent which can be paid off over the following 6 months or over the duration of the life of the lease depending on how long is left).
• A rent waiver of a portion of the rental as an incentive to continue paying rent in full (eg. 20% of rent is waived and never paid as long as the tenant continues to pay the balance 80% without default).
• Converting fixed base rent payments to turnover-style rent only for a set time such that the tenants rental is directly tied to the amount of income they generate. This is a way to share the burden of the economic downturn fairly all else being equal.
• Accessing security deposits or bank guarantees before any breach of the tenant (with the consent of the tenant) to continue rental income cash flow for the landlord now without impacting available cash flow for the tenant. However this would mean that the security would need to be topped up at a later date or could leave the landlord with no security should the tenant fail/vacate before they are able to supplement the security.

A hybrid of the above options is always possible and landlords should have regard to their own cash flow and income tax position when deciding which suits them best (given any reduction will likely impact their income tax for this financial year and next). It should also be noted that building operating costs (outgoings) and utilities expenses will naturally reduce if the tenant is not in occupation of the premises, albeit not entirely as fixed outgoings (rates, insurance, taxes) would still need to be met.

Any amendments or concessions agreed upon will need to be set out in a written agreement/deed to formally vary the terms of the relevant lease to give effect to the changes. When considering such arrangements, landlords should ensure there is a fixed end date to any such agreement and should consider what security they hold in the event the tenant does not pay or becomes insolvent (eg. security deposit/bank guarantee). Given the temporary changes to the Corporations Act, if the tenant is a company without a personal guarantee landlords are encouraged also to seek legal advice to protect their position.

If a rent abatement is unable to be negotiated and the parties are in a dispute note that any retail lease will need to have that dispute referred firstly to the Victorian Small Business Commission (VSBC) for mediation which we note are still currently operational and conducting mediations via video-conference.

Conclusion

New legislation may be enacted in the coming weeks that will impact some of the landlords and tenants rights and our team is always available to assist whenever required. This article does not constitute legal advice but is intended to assist both parties to reach a swift and amicable resolution for their mutual benefit and that of our community and economy as a whole during this unprecedented crisis.

Parties are encouraged to seek legal advice specific to your circumstances before taking any action that may prejudice your position.

Part 1 of our trilogy provides an overview of the legal perspectives.

Part 2 of the trilogy takes a look at the Government assistance and stimulus packages available for tenants and landlord.

About Best Hooper – Victoria’s Property, Planning and Land Development Advisory Law Firm

Best Hooper are the oldest and most prominent developer focused law firm in Victoria who have served our community since 1886; through wars, recessions, depressions and pandemics. We are actively advising clients in relation to the COVID-19 outbreak on all property related matters including leasing, disputes, property transactions and planning advices and applications. We are continuously recognised as industry leaders in a variety of publications, including Doyles Guide and Best Lawyers.

If you require more information, please contact Giancarlo Romano, (03) 9691 0220 or gromano@besthooper.com.au or Robert McKay, (03) 9691 0244 or rmckay@besthooper.com.au.

Giancarlo Romano is a Senior Associate in the Best Hooper Property Team who represents private and corporate landlords and tenants across commercial, retail and residential leasing and all facets of property transactions.

Robert McKay is the Principal of the Best Hooper Disputes Team and he deals with a range of retail and commercial tenancy disputes in his daily practise.