Current as at 16 April 2020
The COVID–19 crisis has led to businesses having a significant decrease in their turnover, with some businesses even being forced to temporarily close their doors. This has led to the problem of tenants not being able to meet their commercial rent commitments. With landlords relying on this rent to meet their own mortgage commitments, they are also faced with the flow on effect of this financial dilemma.
To try to manage this situation the Prime Minister, Scott Morrison, has announced the release of a mandatory Code of Conduct to impose good faith leasing principles between landlords and tenants of commercial tenancies. The Code is to be effective from 3 April 2020, once it is enacted by way of legislation, and is applicable where the tenant is eligible for the Government’s JobKeeper program and has an annual turnover of less than $50 million (SME).
While the Code is effective from 3 April 2020, landlords and tenants alike will have to assume that the legislation will pass as is. The Code is an attempt to share the pain of the crisis between the landlord and tenant. Below is the link to the Code.
Whether you are a tenant or landlord, there are things to be considered when attempting to negotiate rent relief in the above circumstances. The Code sets out principles which should be applied, on a case by case basis, when negotiating these temporary arrangements. These include;
- Leases must not be terminated due to non-payment of rent during the COVID-19 period
- SME tenants must continue to abide by the substantive terms of their lease (subject to amendments under the Code), otherwise they risk forfeiting any protections provided to them under the Code
- Landlords must offer SME tenants reductions in their rent by way of waivers or deferrals of up to 100% in line with the decrease the tenant has experienced in their trading for the COVID-19 period and a reasonable recovery period afterwards.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 period, with a greater proportion in cases where failure to do so may compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had as to whether landlords have the financial ability to allow such additional waivers. Tenants, by agreement, may waive the 50% minimum rent waiver requirement.
- If a rent deferral is agreed to, the deferral must be amortised over the balance of the lease term or for a term of no less than 24 months, whichever is greater (unless otherwise agreed by both parties)
- Landlords should seek to share any benefit, in a proportionate manner, that they receive from any deferred loan repayments.
- They should also look to pass on savings to the tenants on land tax or council rates decreases received.
- Landlords should not draw on tenant’s security during the COVID-19 period and a reasonable recovery period afterwards.
- The tenant should be given the opportunity to extend the lease terms in the recovery period after COVID-19, even if receiving a rent waiver or deferral.
- Landlords are to agree to a freeze on rent increases during the COVID-19 period and recovery period, notwithstanding any previous arrangements between the landlord and tenant.
- Landlords are not to impose penalties if the tenant reduces opening hours, or ceases trading, during the COVID-19 period.
- No fees, charges or interest to be charged by the landlord on rent waived or deferred.
- There will be a need to provide sufficient and accurate financial information, and evidence of eligibility for the JobKeeper program, to help confirm your entitlement as a tenant for such waivers and deferrals.
The Code makes it clear that each lease will be dealt with on a case-by-case basis based on the financial situations of the relevant parties. It is intended that the Code is to be implemented by the States and Territories through legislation or regulations.
Whether you are a landlord or a tenant, if you want clarification of any of the issues described above don’t hesitate to contact us to discuss.
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances.
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