Almost one million people lost their jobs while the underemployment rate increased to 13.7% when the Federal Government shut down non-essential services in March to slow the spread of COVID-19. While the reasons for the drastic measures are understandable, they are certainly cold comfort for tenants who now have to worry about keeping a roof over their heads and for proprietors despairing of keeping their businesses afloat.
The eviction moratorium implemented by all state and territory governments and the National Cabinet Mandatory Code of Conduct has gone some way towards providing security for commercial and residential tenants as discussed in Untangling the Evictions Moratorium for NSW Residential and Commercial Tenancies. Now, Legal Insight explores the practicalities of implementing the temporary rental support measures with Leisha de Aboitiz, Commercial Property partner at Massons and author of Conveyancing Manual NSW, Melanie Bradfield, Legal Aid Housing solicitor and author of the Tenancy chapter in Lawyers Practice Manual NSW and Jessica Tat, author of Motor Vehicle Law NSW, with a particular focus on NSW.
The difficulties in negotiating rent decreases
Rental affordability, commercial or residential, is a topical issue in NSW with Sydney remaining the most unaffordable capital city for residential property. Soon after the announcement of the eviction moratorium, both state and Commonwealth governments were urging tenants and landlords to enter into negotiations over rental payments in good faith.
However, there will undeniably be difficulties encountered by both parties in both the residential and commercial spaces because as Melanie pointed out, “there is a major power imbalance between tenants and landlord when negotiating a rent reduction.”
“The process necessarily requires the tenant to approach the landlord first and put their financial position on the table without knowing that of the landlord”, said Melanie. Should a landlord prove to be unable or unwilling to reduce rents, regardless of their reasons, there is very little a tenant can do. Even though they are protected from eviction until the NSW Civil and Administrative Tribunal is satisfied that negotiations have concluded, any unpaid rent will accrue as arrears during this period as the “regulation ultimately invests all power in the landlord to make the decision about whether to reduce rent, whether it will be payable at a later date, the amount and duration of the reduction”, Melanie warned.
She considered that landlords may themselves be facing financial difficulty during the COVID-19 crisis that will have an impact on their ability to decrease rent. “A number of landlords do rely on rent to either service their mortgage, or as their only source of income”, Melanie noted and further advising landlords to “seek financial advice about land tax and potential income tax deductions, which they may benefit from if they agree to rent reductions.”
Leisha agreed that there is a similar power imbalance for commercial tenants, saying that “impacted lessees simply may not be able to afford legal representation and may therefore agree to less favourable terms, or settle for less than they are entitled to through a fear of incurring dispute-related costs if a commercial agreement can’t be reached”.
She observed that for landlords, “the difficulties are more likely to be linked to distinguishing between pre-existing (unrelated) breaches and breaches properly occurring during” the period of operation of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Relief Period). Her main concern is that it “will not always be easy to establish the extent of genuine COVID-19 impact on tenants, particularly in circumstances where many tenants will be approaching landlords for relief and not all claims will be capable of being fully substantiated.”
Leisha suggested that when renegotiating existing terms, consideration ought to be given to “mechanisms which permit a degree of flexibility given that the duration and extent of financial impact for a tenant is likely to fluctuate during the Relief Period and it would seem reasonable for extended relief to be conditional on (and commensurate to) any ongoing or continuing financial impact for a tenant.”
Leisha further signalled that new leases negotiated during this time will not be covered by the Regulations and so “you should of course be factoring in appropriate contractual protections given statutory protection won’t apply”.
Suitable evidence of reduced income
Residential tenants will be required to demonstrate that they are financially impacted by COVID-19 in order to be included in the 60 day stop on evictions and longer six-month restrictions.
Melanie encouraged tenants to make every effort to provide adequate information and evidence to demonstrate reduced income as “a greater level of transparency will likely improve negotiations”.
She suggested that tenants could submit “redacted bank statements which only show monetary figures”, “evidence from Centrelink [that] they have applied for or are receiving Jobseeker payments”, a statement of financial position drafted with the assistance of a financial counsellor or even “documentary evidence from their employer that they have been let go or that their hours have been reduced”.
Commercial lessees have also been urged to provide sufficient documentation to demonstrate actual decline in turnover. Service NSW recommends that comparative bank statements or Business Activity Statement documentation accompany any appeal for rental relief along with specific details such as the percentage of the rental reduction requested and an outline of how much is to be waived and how much is to be deferred.
While it is significant that landlords are admonished to act reasonably and not place onerous requests on tenants for documentation, Melanie noted that if negotiations fail, the “regulation includes a requirement for the tribunal to consider the full financial positions of both parties when determining whether it should terminate a tenancy due to rent arrears”.
Disbursement of rental relief
Landlords in the NSW residential and commercial spheres are being offered land tax relief from the State government. Significantly, commercial landlords are charged with an additional obligation to pass the land tax concessions on to their tenants in the form of a rent reduction in order to be eligible for the concession.
Leisha believes that “for any impacted lessee who pays fixed amounts for statutory charges (land tax, rates etc) or landlord’s insurance, the impacted lessee will be entitled to a reduction in that fixed amount if the landlord was able to get a reduction of the statutory charge/insurance. The reduction should flow through to the lessee in the same proportion or ratio as received by the landlord”.
However, Leisha explained that “most tenants pay outgoings on the basis of estimates, with a ‘wash up’ at the end of the outgoings year” and unfortunately, this ambiguity and the requirement to pass on the concession has the potential to be a nightmare for all parties concerned.
A key component of the eviction moratorium and National Cabinet Mandatory Code of Conduct has been the obligation for both parties to negotiate rental reductions “in good faith”. Nevertheless, there have been news reports of tenants and landlords playing hardball – from tenants simply refusing to pay any rent or requesting rent waivers when they did not meet the requirements set out in the legislation to landlords choosing not to include outgoings or refusing to reduce rent until they themselves receive assistance from the government.
The government has since intervened to provide a little more clarity around eligibility for rent waivers and land tax concessions and to direct deadlocked parties to mediators. Specifically for commercial landlords, Leisha summarised:
“A landlord is not entitled to pursue any ‘prescribed action’ (eg terminate, re-enter, draw down on security etc) without first complying [with] the obligation to renegotiate the lease terms with an ‘impacted lessee’ in good faith and having regard to the economic impacts of the COVID-19 pandemic and the leasing principles in the Code.
“The Regulations provide for alternative dispute resolution processes where there is non-compliance or parties are unable to agree during renegotiation. Leases captured under the Retail Leases Act 1994 (NSW) (RLA) will go through the usual dispute resolution process under that Act (mediation/NSW Civil & Administrative Tribunal (NCAT)). Non-RLA leases will go through a mediation facilitated by the Small Business Commissioner and, if that proves unsuccessful, the usual court process.
“Should any matters reach the courts or NCAT, the Regulations explicitly state that the relevant decision maker must have regard to the leasing principles set out in the Code when making a decision or order.”
In general, landlord insurance and/or business interruption insurance are taken out to cover the loss of rent or income. However, news reports abound of landlords discovering that their compassion for their tenants has meant that their insurance will not cover them for any negotiated rental reduction because, as Jessica pointed out, “an agreement for rent relief or reduction is a common exclusion”.
She further clarified that “exclusions triggered by rent relief agreements are not unreasonable, because it is effectively a new agreement between the landlord and tenant, albeit temporary. The purpose of landlord insurance is not necessarily to cover the landlord for losses they otherwise have agreed to, but to provide cover where there has been a default by the tenant.”
Fortunately, “the need to evict a tenant is not stipulated as a mandatory condition to claim based on the policies I have reviewed, so the moratorium on evictions may not necessarily be a barrier to claim in some cases”, added Jessica.
She stressed that before negotiating with tenants or agreeing to any rent reductions, “landlords should understand and appreciate the parameters of their specific policy to ensure that temporary agreements during the COVID-19 outbreak with the tenant does not inadvertently result in loss beyond their expectations, and without the ability to claim” and cautions that “what ‘can’ be done during the COVID-19 period and when will depend on the state government measures and landlords should refer to NSW Fair Trading for the latest updates”.
Insurers’ assistance for landlords
In the wake of the Hayne Report, the fact that compassion is resulting in financial loss without an ability to recoup some of the deficit is undoubtedly grating. “Proactive engagement with policyholders could … facilitate transparency and interpretation of policies, which could assist in ensuring the fair, honest and reasonable management of claims,” opined Jessica, which would certainly help temper the public’s perception of insurers in general.
She recommended that “insurers could consider, if this is not already done, notifying policyholders from time to time of changes to COVID-19 measures. Where there are uncertain or ill-defined terms in the policy wording, insurers could assist by defining terms in the context of COVID-19, where possible.
“No doubt insurers are alive to the financial hardships that COVID-19 has put many in. Policyholders should contact their insurer for clarification and direction if they have any queries regarding any requirements that they need to satisfy if they need to claim on the policy. Open dialogue with the insurer, regardless of the initiating party, is an effective way of addressing any uncertainty and could help minimise disputes before they arise.
“Another benefit in having early discussions with insurers is that the insurer may have already decided it will allow COVID-19 claims, notwithstanding the exclusions in their policy. If that’s the case, it should provide landlords with some financial assistance, which should in turn also benefit the tenant.”
The end game
The COVID-19 pandemic and the harsh measures to save lives have taken an alarming economic toll on top of the obvious detriment to physical and mental health. There will surely be a reckoning when restrictions are lifted. As at the time of publication, there were 102 confirmed deaths due to COVID-19 and early modelling has estimated that Australia’s economy could contract by AUD$ 34.2 billion over a year. Tenancies, both residential and commercial, are but one small part in the economic apparatus. Melanie reflected that “it is short sighted for landlords to evict tenants at this point in time, as they may not be financially better off if they do … . As restrictions lift, tenancies may be viable, therefore it may be in everyone’s best interests to work to sustain tenancies during these difficult times.”
Clearly, the catchcry from the beginning of the restrictions has never been more appropriate – we are all in this together!