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COVID-19: Update on Commercial Leases

Following Government announcements of the closure of recreational and various retail services effective 12.00am on 26 March 2020, uncertainty and distress continues to rise for commercial landlords and their tenants.

Whilst tenancies legislation is governed by the States and the Prime Minister has suggested that landlords are amongst those who “are going to be making sacrifices in the months ahead, and everyone does have that role to play”, the reality is that landlords are being hit hard by the pandemic, putting them in breach of their own obligations in particular to their financiers.

Although the Prime Minister has foreshowed that government assistance for this sector is being considered, there is currently no provision for federal assistance to landlords whose tenants are, or will be in default due to COVID-19 and no specific provisions for tenants granting relief from their lease obligations.

The assistance that landlords and tenants could potentially access is limited to whether they qualify for the relief as an SME in the categories outlined in the general government stimulus package.

Are Landlords obliged to give relief?

Although there is no obligation for a landlord to provide any rent relief (in whatever form that may take), it is an avenue that landlords are considering and arguably must consider, for their own long term viability.

Many landlords have already taken the step to either:

  • suspend tenant payments for a certain period of months, or
  • provide relief from payment of full rent and/or adding the difference to the end of the lease term.

These are just some options but consideration can be given to other alternatives that might better suit the specific landlord or the tenants.

If landlords do not work with their tenants to provide some form of relief of their lease obligations, the risks for landlords include that the tenant may:

  • simply stop paying in any event; and
  • cease to trade (whether by choice or by obligation) and vacate the premises (without making good), leaving an empty tenancy, which in the current climate will unlikely be able to be re-let for at least the next 6-12 months.

If either of those two issues arise, the landlord will also have difficulty in pursuing recovery and enforcement options because, leaving aside the likelihood that the capacity to recover will be minimal, the Corporations Act and Bankruptcy Act have been amended effective 25 March 2020 to increase the dollar threshold to issue Statutory Demands and Bankruptcy Notices. Both thresholds have been increased to $20,000 and action being taken on those notices will be prevented before the expiry of a six month period.

Moreover, the Courts are limiting and adopting different procedures to accommodate hearings to avoid attendance at Court. This means that even if civil proceedings are issued, the matter would not likely be prosecuted efficiently in the current circumstances. In light of the legislative amendments to pursue recovery of a debt, the Court will likely make procedural and other enforcement type orders in a manner which is consistent with providing some relief to debtors in line with the approach by the Government. This will only serve to delay any possible recovery to the landlord.

Action for Landlords

Landlords should engage with their financiers and seek their support to relieve them of or offer them alternatives to compliance with their covenants.

Lessors must also, as soon as possible, communicate with and support the tenant (as best and as commercially practicable as possible) through these unprecedented times. Consideration should be given to a long-term objective to retain tenants, so that when trade can resume to some level of normality, tenants are ready to go and tenancies are still filled and not vacant.

Cowell Clarke has significant experience in advising landlords of commercial and retail premises. If you have any queries, please Contact Us and Symoane Mercurio or Peter Leech will be able to provide you with some assistance.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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