My tenant cannot pay me rent because of COVID-19! Can I claim under my landlord’s property insurance cover?
MY TENANT CANNOT PAY ME RENT BECAUSE OF COVID-19!
CAN I CLAIM UNDER MY LANDLORD’S PROPERTY INSURANCE COVER?
The Prime Minister announced on 29 March 2020 a moratorium on landlords evicting tenants from commercial/retail and from residential rental properties. The Prime Minster stated that Victoria (and all other States and Territories) would be implementing a six (6) month ban on evictions of tenants as a result of financial distress if they are unable to meet their rental commitments.
As at the date of the announcement, it is not clear when the moratorium will start but we guess that it will be from 1 April 2020 and will therefore run until 30 September 2020, unless extended.
As at the time of this article, there is no detail of what “financial distress” means or how tenants will be able to show that they are “unable to meet their rental commitments”.
Previous announcements from the Victorian and Commonwealth Governments, however, suggest that if a tenant has had to close its business as a result of the staged shutdowns in a commercial/ retail rental context, or if a residential tenant has been stood down or made redundant as a result of the staged shutdowns, this may constitute deemed financial distress and an inability to meet rental payments.
There is no direct causal correlation, however, between a business shutdown and curtailment or cessation of employment on the one hand and the inability to continue to make rental payments on the other hand. Landlords could reasonably expect that tenants should have to continue to meet rental payments from savings. Of course, the reality is likely to be very different. Our advice is that landlords will need to carefully assess individual tenancy circumstances and seek legal advice from De Marco Lawyers if they have any doubt.
Many landlords will not have landlord’s commercial/retail and residential property insurance (“landlord’s property insurance”). Some landlords will have engaged in a thorough risk management process and will have concluded that the costs of such insurance cover outweigh the likely benefits in their situation. Others, probably the vast majority, will have never heard of landlord’s property insurance or will simply have discarded it without investigation as an unnecessary expense.
If landlords have not heard of landlord’s property insurance coverage, they should be asking their rental managers why not.
If landlords do have commercial/retail or residential property insurance, what is it likely to cover in these COVID-19 circumstances?
Traditional landlord’s property insurance will cover loss of rent and rent default. Loss of rent is common: rent default is uncommon. The policy will often not cover this unless a specific additional premium is paid.
Loss of rent will give a landlord indemnity, up to a specified sum insured (normally the annual gross rental from the investment property), in the following circumstances:
First, there must be loss or damage to the insured buildings or contents as a result of an incident covered by the policy. This is generally fire or explosion, storm, rainwater or wind, water or liquid damage or loss or damage by a tenant; then
Whilst the rental property is uninhabitable, the insurer will cover loss of rent.
Loss of rent cover is therefore unlikely to be of much use to landlords if a tenant is claiming an inability to pay rent due to a COVID-19 event. Simply, there will be no loss or damage to the insured buildings. Most landlord’s property insurance will not cover loss or damage to buildings arising from, for instance, the fact that the property has become contaminated with COVID-19 virus and has become uninhabitable as a result and will remain uninhabitable until it is professionally cleaned. The fact that businesses are shut because of staged closedowns does not constitute loss or damage to inured property.
A more appropriate cover might be rent default. This cover will indemnify a landlord up to a fixed amount (generally not more than the annual gross rental) if a tenant stops paying rent owed to you. This indemnity only arises if the tenant breaches the rental agreement and the landlord has taken all reasonable steps legally available under the respective leases and under the Retail Leases Act or under the Residential Tenancies Act to remedy the non-payment and evict the tenant.
Landlords with this type of insurance may face difficulties making claims on their rent default insurance in these COVID-19 circumstances. A tenant may not breach a commercial/retail or residential lease agreement if the Government has sanctioned a moratorium on evictions as a result of deemed financial distress caused by the staged closedowns. Moreover, landlords will have difficulties in taking any reasonably available legal steps either in Court or in VCAT to remedy the non-payment and evict the tenant as required by policy wordings.
Whether or not insurers will be under pressure to relax the effect of these conditions and thereby allow landlords to pass on rental losses to tenants remains to be seen. Historically, the insurance industry has tendered to initially adopt a tough line in relation to flood and bushfire claims until such time as political pressure causes insurers to relax conditions and exclusions.
Until the details of the moratorium become clearer, landlords should not, at the very least, voluntarily waive rental but should insist that tenants pay rent as normal unless and until they qualify for the moratorium. What proof will be required remains to be seen. Whilst this may appear harsh, insurers may well reject claims by landlords under landlord’s protection policies upon the basis that the proximate or main cause was the landlord’s decision to voluntary forgive rent immediately irrespective of whether or not the commercial/retail or residential tenant was suffering any financial distress at all which was caused by COVID-19.
Furthermore, landlords will need legal assistance to investigate whether the Government’s moratorium means rent is simply forgiven or whether it is delayed until after the period ends on 1 September 2020 or otherwise. If the landlord is then able to gradually recover the rent postponed for six (6) months, in the months or years to come, insurers may also take the view that there has been no loss and therefore no policy claim entitlement in the first place.
If landlords have vacant properties during the moratorium, or any extension of it, and are unable to find replacement tenants, they should remember they are obliged to notify their insurers where the period of rental unoccupancy exists for more than sixty (60) days or other period specified by the policy. A property which is unoccupied for greater than that period is regarded by insurers as a greater risk. The insurer might be entitled to review the terms upon which it will continue the cover. Landlords would be wise to put in place electronic or physical monitoring of properties that are going to be unoccupied for lengthy periods.
The moratorium is likely to impose significant financial pressure on landlords. They should seek appropriate legal and insurance advice from De Marco Lawyers to ensure that tenants do comply with the terms and conditions of the moratorium and that landlords have access to any appropriate financial sources by way of compensation. For instance, the main Banks have announced they will allow large commercial landlords with loans of up to $10 million to delay their loan repayments by up to six (6) months upon the condition their tenants are not evicted due to the coronavirus crisis. Whether this will apply to working families with one investment property and a negatively-geared mortgage which is only repayable in times of full employment remains to be seen. Another imponderable is whether private non-bank lenders will be as accommodating.
Landlords may well wonder what the legal source of these governmental moratoria are. Leases are a State/Territory responsibility, not Federal. The fact we have a National Cabinet presumably overcomes this issue, notwithstanding there is no constitutional basis for such an institution. Federally, the Biosecurity Act 2015 (Com.) allows the declaration of a human biosecurity emergency which the Governor-General did on 18 March 2020 for a period of there months. Similar powers exist under Victoria’s Public Health and Wellbeing Act, where a state of emergency was declared on 16 March 2020 for a period of four weeks. These Acts enable self-isolating and quarantine restrictions. Neither Act would extend to empowering rent/loan moratoria. Victoria has the power to call a state of disaster under the Emergency Management Act if there is significant and widespread changes to life or property. This law was used during the 2019/20 bushfires to take control of property and of population movement in and out of disaster areas. Ultimately, however, retrospective legislation and/or regulation may be the legislative fallback to legalize the moratoria.
One final word of wisdom. The writer’s grandfather was a Londoner who endured the Blitz as a tenant during World War II. After the War, he became a landlord after a distinguished career as a book publisher. His creed was simply this: “Rents may come and go but good tenants endure forever. Support them, and they will support you.”
De Marco Lawyers’ team consist not only of LIV Property Law Specialists, but also a senior Chartered Loss Adjuster qualified in Australia, the United Kingdom and in Europe as well as a Certified Insurance Professional. We are well qualified to advise on all aspects of commercial/retail and residential leasing and on business and residential insurance matters.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.