With record high underemployment rates during COVID-19, millions of Australians are having trouble affording their usual rent payments. In response, all jurisdictions have enacted moratoriums on evictions for commercial and residential tenants for failure to pay rent where they are financially impacted by COVID-19.
The NSW Government enacted the Residential Tenancies Amendment (COVID-19) Regulation 2020 in April which places a 60 day stop on evictions for financially impacted residential tenants and sets up a legal framework to enable landlords and tenants to negotiate rental reductions. The National Cabinet also created a code of conduct to protect commercial lessees who are eligible for JobKeeper from terminations and set up guidelines for negotiating rent until 24 October. This was implemented by NSW in the Retail and Other Commercial Leases (COVID-19) Regulation 2020.
Legal Insight discussed the key implications of these NSW Regulations 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.
For residential tenants, there is a 60 day stop on evictions for financially impacted tenants and landlords will not be able to evict such tenants for 6 months where they have not attempted a “good faith” negotiation on rent reduction. Melanie noted however that the moratorium on evictions does not constitute a general protection against eviction.
“The moratorium itself only applies to ‘impacted tenants’. That is, private tenants who are in financial difficulty as a direct result of COVID-19 and whose household income has decreased by at least 25%.”
For impacted tenants, there are some protections available if their lease is terminated after the 60 day stop on evictions:
“A landlord is able to pursue tenants for rent arrears, however it will be unlawful for landlords to blacklist tenants on a tenancy database if they were terminated due to rent arrears.”
She recommended that impacted tenants begin negotiations about rent reduction as soon as possible:
“Tenants will be liable for the full rent until they have come to a mutually agreed rent reduction with their landlord. It may become clear to tenants early on that they aren’t going to be able to come to an agreement with the landlord and they may need to consider what other options they have.”
Regarding commercial tenants, Leisha noted that the Retail and Other Commercial Leases (COVID-19) Regulation 2020 applies to “leases entered into (and options exercised or renewals triggered) on or prior to 24 April 2020, and they are targeted at ‘impacted lessees’, being tenants that meet specified criteria, including a turnover of less than $50 million and eligibility for JobKeeper (ie business where turnover drops by 30%).”
“The Regulations contemplate tenant protection from certain landlord actions being taken between 24 April 2020 and 24 October 2020 (Relief Period) (eg eviction, re-entry, termination, damages claims, interest charges, security draw downs, personal guarantee enforcement).”
Similarly to the situation for residential tenants, the Regulation creates a framework for rent negotiations:
“Either party may trigger renegotiation within the framework of the Regulations. Once triggered, the parties are obliged to renegotiate existing lease terms in good faith and may commercially agree to contract out of the Regulations. Alternate dispute resolution processes are contemplated where agreement cannot be reached,” said Leisha.
Potential gaps in protection
The NSW government acted very quickly in passing both sets of Regulations which has been important in preventing large numbers of evictions and in allowing businesses to remain open, both supporting public health and the economy. However, the speed of drafting may have also resulted in some ambiguity and gaps in protection.
Melanie pointed out that the changes have not made it mandatory for landlords to reduce rent or given the NCAT powers to reduce the rent of impacted residential tenants. Rather, the NCAT may refuse to terminate a tenancy where a tenant can show the landlord did not negotiate in good faith.
“The tenant remains liable for all of the rent and will likely incur a large rent arrears. This is likely to cause extreme financial hardship for people that have already suffered due to COVID-19,” said Melanie.
She also noted that break fees have not been adequately addressed by the Regulations despite this being a common issue faced by clients at Legal Aid NSW.
“On 15 May 2020 further changes were introduced to allow impacted tenants to terminate their tenancy if they are unable to come to an agreement on a reduced rent after going through the formal negotiation process with Fair Trading. However, the tenant will still be liable for the arrear debt that has accrued and the tribunal can also order them to pay a further two week break fee to the landlord,” she said.
The scope of application may also be inadequate, with Melanie pointing out that the Regulation does not apply to social housing tenancies or generally to private tenants:
“There are gaps in the protection that mean that vulnerable people, who may not be able to sustain tenancies during COVID-19, will not have stable accommodation and a safe place to self-isolate.”
Ambiguity in drafting
Commercial tenants and landlords face similar ambiguity as to scope of application, which is especially concerning during a time of broader economic uncertainty. Leisha considered that some of the drafting is ambiguous, potentially due to the speed with which it was passed and the fact it was not subject to the usual industry review process:
“As a result of the ambiguity, the Regulations could apply more broadly and more flexibly than the commentary has suggested, both in terms of who might benefit (in addition to ‘impacted lessees’) and what might be prevented or allowed,” she said.
“It will be interesting to see whether landlords and tenants seek to take advantage of the various ambiguities and whether those who ‘push the boundaries’ are ever tested in a court, or whether the leasing market just works things out for itself, as it often does.”
What is a negotiation “in good faith”?
A key aspect of the Residential Tenancies Amendment (COVID-19) Regulation 2020 (NSW) prohibits landlords from evicting financially impacted tenants without participating in a “good faith” negotiation regarding rent payments. As this term is not used anywhere else in the Residential Tenancies Act 2010 (NSW), Melanie suggests this may cause some difficulties with interpretation.
“It is likely to be a subjective test and consider what is reasonable in the circumstances of the case. For example, a tenant may simply be unable to agree to rent above a certain amount because they can’t afford it based on their reduced income and landlords will seriously need to consider their circumstances and ability to compromise when negotiating a temporary arrangement.”
A ‘good faith negotiation’ requires compromise from both parties but it also imposes an obligation on the landlord to ‘weigh up all the circumstances and act fairly when negotiating with tenants’.
“In our view a ‘good faith negotiation’ will require both parties to be transparent and provide clear evidence of their financial situation. This is what will likely be required by the tribunal, if negotiations fail. This of course needs to be balanced with maintaining each party’s privacy, which requires a degree of good faith during the negotiation process.”
From April, those financially affected by COVID-19 are able to access up to $10,000 in super to support themselves during unemployment or reduced hours. ASIC has already warned Real Estate agents against advising tenants to access their super early as it constitutes unlicensed financial advice.
Melanie observed that some landlords have also been asking tenants to access their super early or exhaust their savings before agreeing to a reduction in rent:
“The tribunal may be called on to determine if it is reasonable for tenants to exhaust their savings on rent, especially when they need to pay for other essential costs of living, with limited income.
“In our view, it would be problematic and unreasonable if a tenant is unable to retain some savings to provide a buffer during economic and employment uncertainty, so that they can deal with the general vicissitudes of life.”
For commercial landlords and tenants, Leisha notes that an obligation of “good faith” requires parties to “engage in an honest and genuine negotiation.”
“Whilst this does not mean a party needs to put their own interests aside, they do need to make an honest and genuine assessment of their position and negotiate accordingly,” she said.
“Further, the parties must refrain from acting in ‘bad faith’, for example they should not seek to undermine any previously agreed bargain or make excessive demands, with an intent to simply drive the other party towards a dispute – particularly in circumstances where it is clear that the other party cannot afford to litigate.”
Residential tenants evicted on other grounds
The Residential Tenancies amendment does not restrict the ability of a landlord to evict a financially impacted tenant on grounds other than for inability to pay rent, except insofar as it increases the applicable notice periods.
“The other change made by the regulation is to increase notice periods where landlords want to terminate tenancies at the end of the fixed term, for breach of the agreement or if they want to terminate a long-term tenancy (20 years or more). In these cases, they must give 90 days’ notice to the tenant before applying to the tribunal,” said Melanie.
“Landlords can also apply to terminate the tenancy because they are in financial hardship, regardless of whether or not the tenant is seeking a rent reduction as a result of losing their job due to COVID-19.”
Relief available to residential landlords
Landlords may also face difficulties in meeting their own financial obligations of mortgage repayments and other expenses when their tenants are no longer able to afford their usual rent payments. The NSW government has offered land tax relief but has left other options of relief largely to the discretion of banks and other financial institutions:
“Each bank will have its own policies and guidelines on dealing with financial hardship. Many will allow mortgage deferrals however such deferrals may not be interest free and may lead to an increase in repayments at a later date or an increase in the length of the loan,” warned Melanie.
“Landlords who are unable to afford a rental reduction will need to provide evidence to the tribunal of their financial circumstances in the same way as tenants.”
Melanie noted that the NSW Parliament has recommended that financial assistance be available to landlords through the Property Services Compensation Fund:
“If this is introduced it will act as a rent relief scheme that enables a landlord to claim a maximum of $2500 per landlord per tenancy. In order to be eligible the landlord will need to reduce the tenant’s rent by the amount of any payment they receive under the scheme.”
COVID-19 “pandemic period” and insurance claims
The National Cabinet Mandatory Code of Conduct which informed the NSW Regulation on commercial leases has defined the “pandemic period” by reference to when the JobKeeper programme remains in effect. According to the latest government advice, this will remain until October.
Insurance law expert, Jessica Tat, considered that the purpose of the Code of Conduct and NSW Regulation is to “provide guidance to landlords and tenants in their negotiations on any temporary relief agreement” rather than dictate the circumstances in which the reduction should be applied.
“Therefore, it seems unlikely that the Code itself or when a business returns to trading alone, would impact on a landlord’s eligibility to claim, unless there are terms in the policy that goes to the tenant’s ability to trade.
“When and if a landlord can claim should depend on the terms of the policy, the lease agreement and what steps the landlord has taken pursuant to the policy given the constraints of the relevant state government’s COVID-10 measures. For landlords that have agreed to temporary rent relief, the terms of the temporary agreement are also relevant.”
The COVID-19 pandemic has had wide-reaching and extraordinary consequences on our economy, resulting in record high underemployment rates and large numbers of businesses struggling to stay afloat. Balancing the needs of landlords and tenants in this uncertain time remains challenging, especially with the unequal relationship between parties to both commercial and residential leases. While the NSW Government response has been swift, there are still some concerning gaps in protection which may pose difficulty for those left vulnerable in the pandemic.
In a follow up piece on the topic, Legal Insight continued the discussion with Melanie, Leisha and Jessica as to the practicalities of implementing these rental support measures during COVID-19. For further reading, head right over to A Lawyer’s Guide to the NSW Evictions Moratorium.