Rent Relief - Commercial Leasing Principles and COVID-19
You may be aware that as a part of its response to the Covid-19 emergency, National Cabinet has adopted a Mandatory Code of Conduct governing Leasing Principles in regard to SMEs. The aim of the response is to provide real and immediate rent relief by way of rental waiver, and rental deferment to those SMEs who also qualify for the JobKeeper subsidy.
The information below is from the Prime Minister’s Media Statement of 7 April 2020.
(The full statement is also attached for your consideration.)
The Effect: Qualifying tenants are to be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis, i.e.. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.
At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.
Up to half could be through a deferral of rent, with this to be recouped over at least 24 months, as negotiated by the parties
For example:
If the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral.
If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral. Repayment of the deferred rent should not compromise the ability of the tenant to recover from the crisis
The purpose of the Code is to impose a set of ‘good faith’ leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, in circumstances where:
A: the tenant is a small-medium sized business (annual turnover of up to $50 million) and,
B: is an eligible business for the purpose of the Commonwealth Government’s JobKeeper program.
The following leasing principles should be applied, on a case-by-case basis:
(please note that the underlining emphasis is ours).
1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
2. Tenants must remain committed to the terms of their lease, subject to any amendments negotiated under this Code.
Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
5. Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
6. Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
7. A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
8. Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
9. If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
10. No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
11. Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
12. The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
14. Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
BINDING MEDIATION: Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable. Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
Disclaimer: Kindly note that the information contained in this email is general advice only, and does not take the place advice specific to your particular circumstances. We can take no responsibility for any loss, however incurred, as a result of providing this general information.
Do let us know if you have any questions or require further information.
We are fortunate in having access to legal counsel and realtors with reliable expertise in this area.