COVID-19 - Changes to residential and commercial leases

The impacts on commercial and residential leases and support available.

Tenants, commercial and residential alike, have asked whether they continue to have an obligation to pay rent even if they are unable to generate cashflow or an income due to the social distancing measures and restrictions designed to curb the spread of coronavirus or due to job loss as a result of COVID-19.

Leases do not often have provisions to provide rent relief to tenants or changes to a landlord’s right to terminate for breach for non-payment of rent on such grounds.

During this crisis and in the absence of any legislation being passed, the Commonwealth and State Governments have encouraged tenants and landlords to work together to negotiate openly and in good faith temporary amendments to existing leasing arrangements for those tenants that are significantly affected by COVID-19.

Support for tenants and landlords in Victoria  

The Victorian Government will bring urgent legislation to the Parliament on Thursday 23 April 2020 in line with the decisions of the National Cabinet to support tenants and landlords through the coronavirus pandemic by reforming residential and commercial tenancy laws to take effect on 29 March 2020. Other State and Territory Governments have already announced similar plans.

Based on the information released by the Victorian Government and their agencies so far, the measures will include:

Commercial tenancies

The implementation of a mandatory Code of Conduct developed by the National Cabinet in consultation with landlord and tenant representative bodies to impose a set of good faith leasing principles for application to commercial tenancies between landlords and eligible small and medium sized business.

The leasing principles that have guided the development of the Code of Conduct include:

1. Where it can, rent should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome.

2. There will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between landlords and tenants.
   An example of this is where a tenant has suffered a 100% decline in revenue, then at a minimum the landlord should provide a 50% rent free/waiver, with the other 50% to be deferred rent and to be recouped by the landlord after the pandemic period

3. There will be a prohibition on termination of leases for non-payment of rent (lockouts and eviction).

4. There will be a freeze on rent increases (except for turnover leases).

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

6. There will be a prohibition on landlords passing land tax to tenants (if not already legislated).

7. There will be a prohibition on landlords charging interest on unpaid rent.

8. There will be a prohibition on landlords from making a claim to a bank guarantee or security deposit for non-payment of rent.

9. Ensure that any legislative barriers or administrative hurdles to lease extensions are removed (so that a tenant and landlord could agree a rent waiver in return for a lease extension).

Residential tenancies

1. a ban on evictions of tenants as a result of financial distress for the next six months if they are unable to meet their commitments due to the impact of coronavirus, except in specific circumstances (including if the tenant damages the property, uses it for criminal activity, or serious violence occurs) or if a tenant is able to pay rent, but wilfully does not.

2. a ban on rent increases for the next six months

3. rental assistance for those tenants facing financial hardship who are unable to secure a rent reduction from landlords. The parties must engage in a dispute resolution process using Consumer Affairs Victoria’s dispute resolution service.

4. where a tenant(s) wishes to break a lease early, break lease fees will not apply.

5. A landlord will not be able to list a tenant on a residential tenancy database (blacklist) if a tenant is unable to pay rent because of coronavirus.

6. If a landlord agrees to reduce the rent, the landlord may also be eligible for a 25 per cent land tax reduction with any remaining land tax can be deferred until March 2021.

We recommend that you seek advice if you require clarity on how the changes to the laws will affect you or your business, how to negotiate and tailor an agreement with the other party and to formalise any variations to your existing leasing arrangements in writing.

A full copy of the mandatory Code of Conduct can be found here.