The economic shock waves arising from COVID-19 are set to be felt by Australians for many years. With the Federal government formally conceding that Australia is in a recession, financial experts are forecasting an extensive period of economic hardship, with the most challenging times still ahead.
The debilitating effects of COVID-19 have been felt strongly within the Australian commercial property market. With businesses forced to close their doors – and many going under entirely – the commercial property market is experiencing an indelible strain. This has led property owners to question the validity of property insurance and commercial building insurance, with respect to COVID-19.
Will property insurance or commercial building insurance cover losses caused by COVID-19?
Many property insurance and commercial building insurance policies offer coverage for business interruption.
Insurance policies will differ in their terms and conditions. In relation to disease, the insurance industry as a whole has introduced a clause which excludes any disease that is identifiable by the Quarantine Act of 1908. This has been updated by many insurers to meet changes in legislation to the Biosecurity Act of 2015.
As COVID-19 is defined as a contagious disease, property owners will not be able to claim for loss of revenue – including loss of rent – through their business interruption policy.
COVID-19 and Commercial Property Landlords
The onset of COVID-19 and the ensuing restrictions has resulted in many businesses being unable to operate. This has created a situation where business owners can no longer pay their rent.
Due to such an unprecedented pandemic, business owners are largely protected, both from making repayments and from eviction. For property owners, they need to be aware of the impacts to the 90-day clause for unoccupancy, as well as the effects to a claim payout.
Commercial property landlords are, at present, unable to terminate leases or evict tenants for rent arrears resulting from COVID-19.
Government Assistance for Landlords
Fortunately, federal and state governments have seen fit to offer commercial property landlords some welcome relief. As we brace for continued economic uncertainty, it’s time to clarify what your rights are as a commercial property owner.
On the one hand, landlords affected by a dampening of the market need to safeguard their rental earnings. On the opposite side of the spectrum, many business owners are experiencing an enormous downturn in trade as a result of enforced restrictions. Finding a solution that allows businesses to stay in their premises – whilst ensuring that the owners do not unfairly suffer – is a delicate balance.
What Happens if my Commercial Tenant Cannot Pay Their Rent?
In Victoria, the state government has rolled out a Commercial Tenancies Relief Scheme. Under this scheme, landlords are obligated to work with their commercial tenants to negotiate a solution that allows tenants to remain in the property.
This does not mean that tenants can be excused of all financial responsibility. Specific conditions should be fulfilled and relief measures have been created to counter losses for landlords.
Who Can Receive Commercial Property Rent Relief?
In any environment, property managers and tenants are within their rights to re-negotiate a lease at any time. However, with respect to COVID-19, a renter’s right to bargain is reinforced by the Commercial Tenancy Relief Scheme. Under the plan, a tenant is entitled to relief if they satisfy the following conditions:
- They are a small-to-medium enterprise with an annual turnover of less than $50 million.
- They are participating in the Federal government’s JobKeeper system.
How Do Tenants Apply for Commercial Property Rent Relief?
To ensure that tenants do not abuse the system, they are obligated to submit a formal application and to provide necessary evidence to support their claim. All commercial tenants must comply with the following points:
- Make a written request for rental assistance
- Provide written verification of their identity
Tenants will also need to confirm their eligibility by meeting the following guidelines:
- Written evidence confirming their business turnover is less than $50 million.
- Written evidence that confirms they are participating in the JobKeeper scheme.
- A statement that proves their lease is an eligible lease within the parameters of the scheme.
Without this evidence, landlords are not legally obligated to negotiate rental relief. However, due to such unprecedented circumstances, owners are encouraged to have constructive conversations with their commercial tenants, irrespective of the type of business and its size.
What Should Landlords Do Once an Application for Commercial Property Rent Relief is Received?
When you obtain a valid application, you are obligated to respond in writing with an offer of rent relief within two weeks. This is unless you and your tenant manage to settle on a different timeline.
Rental relief can be provided in any form that you establish with your tenant. However, landlords should be aware that at least 50% of the value should be exercised in the waiver. For example, if you decide on assistance of $2000 per month, at least $1000 per month must go towards a reduction in rent. Both the landlord and the tenant are encouraged to discuss other forms of assistance pertinent to their situation.
Factors to Consider When Assessing an Application for Commercial Property Rent Relief
This scheme is not designed to allow tenants to simply pay no rent. Tenants are obligated to continue to pay what they can reasonably afford.
To best ensure fairness for landlords and tenants, the following points should be considered when negotiating rental relief:
- The tenant’s decrease in turnover during the COVID-19 pandemic.
- Any kind of non-rent waivers that you are providing to tenants that are assisting to reduce their costs.
- The tenant’s capacity to pay their rent without rental support. This ensures that well-off tenants do not unfairly benefit simply because their turnover is down. If they can reasonably pay their rent, they must continue to do so.
Property landlords should also consider the following scenarios:
- Your genuine ability to offer rental help. Property owners are not obligated to give any more support than they can reasonably afford.
- Any decrease in your expenses as a result of the minimized use of the property. As an example, you may have seen a significant – or total – reduction in cleaning expenses since restrictions were enforced.
- Any Covid-19 benefits that you are receiving that would offset the loss of rental income.
What Can Commercial Landlords Do if a Tenant Refuses to Negotiate?
If your tenant has stopped paying their rent, reduced their rental payments without a formal arrangement, or declined to negotiate on terms, you can submit an application for a free mediation with the Victorian Small Business Commission (VSBC).
A member of the VSBC will then contact both parties to try and negotiate a reasonable solution. If no resolution is made in the first instance, a mediation session can be arranged.
If your tenant refuses to attend the mediation session – and subsequent negotiations fail – the VSBC will issue you with documentation to that effect, enabling you to take the issue to VCAT.
Can Commercial Property Owners Evict Tenants that are Unable to Pay Rent?
Not presently, as there exists a six-month moratorium (until September 29) on evictions due to non-payment of rent.
What Relief is Available to Commercial Property Owners Affected by COVID-19?
As with any business, landlords may be able to qualify for assistance if they meet the set criteria. The government is providing land tax relief to commercial and industrial landlords that provide rent relief to their tenants. Landlords may be eligible for the following assistance:
- JobKeeper Payments
- Commonwealth Temporary Cash Flow Payments
- Vic Government Business Support Fund
The effects of COVID-19 are widespread. For commercial property owners, the restrictions caused by the pandemic have been particularly debilitating. This is compounded by the fact that COVID-19 losses are not covered by property insurance and commercial building insurance policies.
With government assistance in place, there is a degree of support for property owners. It’s important that landlords recognise their legal rights, as well as their responsibilities. This will assist your negotiations with tenants and enable you to reach a more favourable rental agreement.