The Federal Government recently announced a 6 month moratorium on termination of commercial property and residential leases for non-payment of rent. State and Territory governments will be introducing new laws to ban landlords from evicting tenants who suffer financial distress and as a result are unable to meet their financial obligations under the lease.
What will the new laws mean for tenant and landlord rights where there is a breach by the tenant?
While the new legislation has yet to be enacted, the intention of the moratorium is to put a ‘freeze’ on termination rights only – this means a tenant’s obligations to pay rent and outgoings are unaffected and once the moratorium period ends if the tenant remains in breach of the lease a landlord can enforce their rights to evict a tenant.
Therefore, unless the parties agree differently the new laws may serve only to delay an eviction unless all rent and outgoings are paid up by the time the moratorium period ends.
It is not yet clear whether the new laws will vary or ‘freeze’ a landlord’s right to enforce security provided by a tenant, for example, drawing down on bank guarantees or taking action against parties who are guarantors under the lease.
Key considerations during negotiations
You should turn your mind to the following key points:
- Is it a straight rent reduction and waiver or an arrangement to defer payment of some or all of the rent for an agreed period? Irrespective of what is agreed, the parties should consider whether the agreed variation will impact a fixed rental increase or market rent valuation of the rent that occurs in future.
- Additional security: the risk of a tenant becoming insolvent is likely to be heightened as a result of COVID-19. If the variation is to defer the tenant’s rent obligation then landlords should consider:
- Securing payment of the deferred rent: security could be in the form of an additional security deposit, bank guarantee or director or parent company guarantees; and
- Registering on the Personal Property Securities Register: landlords can protect their interest in cash security deposits provided by the tenant by registering a security interest in the security deposit.
- Request a ban on enforcing security arrangements: as noted above, we do not yet know if the new laws will prohibit landlords from drawing down on security deposits or bank guarantees during the moratorium. As added protection, tenants may want to obtain the landlord’s agreement that it will not enforce any security until after the moratorium period ends.
- Mortgagee and lender requirements: the landlord’s loan or mortgage documents may require the lender or mortgagee’s consent for any variation to the lease. Failure to comply with any such requirements may place the landlord in default of its obligations to the bank.
- Loss of rent insurance: before agreeing to any rent concessions a landlord should check the policy terms of any insurance it has to ensure that granting the concession will not void or impact the insurance cover.
Ensure you document the agreed arrangement
Any agreement to waive or defer part of the rent payable for any period of time will be a variation to the terms of the lease. For this reason, landlords and tenants should document their agreement in a Deed of Variation so the parties are clear on how their obligations and entitlements are impacted by the variation.
If the agreed arrangement is not clearly documented landlords may be exposed to claims by the tenant that during negotiations certain representations were made by the landlord and relied upon by the tenant to its detriment.
For guidance on other ways you can protect your interests under the lease, please contact Sotheary Bryant.