The Moratorium on Evictions due to COVID-19 and the Consequences for Tenants, Landlords, and Lenders

On 29 March 2020 the Australian Federal Government announced temporary changes to commercial and residential leases, to assist tenants during the current downturn, including a moratorium on evictions for tenants experiencing financial distress as a result of coronavirus.  In addition to the moratorium the Prime Minister encouraged businesses, landlords, and banks to talk to one another to reach a mutual agreement moving forwards during these challenging times. We have identified the following points which may be of use to our clients.

Importantly, while this announcement has been made by the Prime Minister, it is yet to be put into effect by the State Government in the state of Victoria. As of 31 March 2020, the details of the moratorium and its exact application to residential and commercial tenancy, and any State-based effect are unclear, and further information is to be announced. We will update this article when further details come to light.

What is a moratorium?

A moratorium is a standstill, or a freeze on an activity. As announced by the Prime Minister, the moratorium on evictions means that for a period of six months, landlords are unable to evict their residential or commercial tenants who are experiencing financial stress and cannot meet their payments due to coronavirus. The exact nature of this moratorium is not yet defined, for example it may be that certain financial hardship criteria need to be met. According to the Prime Minister, it is suggested that tenants who are not significantly affected are “expected to honour their lease and rental agreements”.

What does this mean for Tenants?

The moratorium on evictions means that if a tenant fails to pay their rent at any point in the next six months, their landlord cannot evict them during that time. It is important to note that generally speaking, unless stipulated otherwise, interest may continue to accrue on rent owing, which could lead to a significant amount due and payable when the moratorium ends.

Tenants are encouraged to review their lease agreement, and determine how long their lease term is for, and when their next option to renew the lease will take place. Commercial tenants should ascertain whether their lease allows for market rent review, and when the next review is scheduled to take place. Market rent review is an opportunity for parties to review the rent in line with the current market. The lease will generally set out how the market review is to be conducted, and how rent is calculated. If a lease allows for market review and the market value of the premises has fallen, there may be an opportunity for negotiation of the rent. Given the ever-growing economic crisis as a result of coronavirus, a market review may significantly lower the rent payable moving forwards.

What does this mean for Landlords?

Coronavirus has created an economic crisis, and with the significant loss of jobs in the community and the moratorium on tenant evictions, landlords are faced with the real possibility of their tenants defaulting on rental payments in the coming months. For many landlords, rental payments are their sole or a substantial portion of their income, and this in turn may leave landlords out of pocket.

Landlords should be vigilant in their negotiations with private lenders or their bank in seeking relief by deferring loan repayments or taking out further loans, as there may be unintended consequences. For example, some banks are offering customers to defer their home loan repayments for a period of six months, however there may be accrued interest on unpaid amounts, and repayments after this time could be at a higher rate or increased percentage. Landlords are at risk of being left with high mortgage or loan repayments after the allowances for COVID-19 cease, and cannot guarantee that they will receive full rental repayments by defaulting tenants to cover the additional costs incurred.

Negotiations between Landlords, Tenants, and Banks

Landlords, Banks, and tenants are encouraged to talk to one another in the hope of agreeing upon a mutually agreeble way forwards, and are suggested to consider the following:

  1. a reduction or moratorium on rent for a period of time;
  2. agreement not to issue or enforce late notices or penalties; and
  3. agreement to not accrue interest on unpaid rent.

All parties are advised to carefully review their lease agreements and any special conditions that may be included, and ensure that any amendments are done in a way that is compliant with the terms of the lease, to avoid any confusion of dispute in the future. Further, it may be open for tenants to terminate their lease or seek alternative dispute resolution such as mediation due to financial distress.

The above has been provided for your information and is not to be relied upon as legal advice. Advice may differ depending on a number of factors, including the continued updates from the State and Federal government. If you wish to discuss your specific situation and whether the moratorium may be applicable to you or your business or would like assistance in negotiations between relevant parties, contact us today.

LGM Advisors is a leading commercial litigation Melbourne professional law firm, the experts to contact when you require  commercial lawyers and employment lawyers. LGM Advisors have the skills, experience and expertise to ensure that you and your dispute is consulted upon with the utmost professionalism. Contact LGM Advisors today on (03) 9832 0608 or by email at marketing@lgmadvisors.com.au.

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