Yesterday 7th April 2020, the decision that landlords have been dreading came true: Landlords must waive and defer rent due from their commercial tenants. The National Cabinet of the government agreed that a mandatory code of conduct will be developed to standardise commercial tenancy arrangements affected by COVID-19.
The code is set to rock the commercial property market and will place many landlords under extreme financial pressure.
The announcement is in relation to commercial and retail leases and does not impact residential leases.
Which tenants can gain relief?
The code will apply to tenants with a turnover of less than $50 million per annum.
For small businesses like franchisees the turnover is measured at the franchisee level; for retail corporate groups the measure is at the group level, rather than at the individual retail outlet level.
The tenant must also meet the criteria for the government’s JobKeeper assistance guidelines (with a 30% loss of revenue). What are the new rules?
During the government declared pandemic period:
Termination - Landlords can’t terminate a lease for non-payment of rent.
Pay Rent - Tenants must honour the lease and rents should continue to be paid as usual, if the business is unaffected by COVID-19 pandemic.
Proportionate reduction - If the pandemic has caused financial distress to tenants’ businesses, rent reductions are to apply in the same proportion as the decline in turnover over the course of the pandemic period.
Waivers & Deferrals - This must be done by a combination of rent waivers and rent deferrals.
50% waiver - Rent waivers must account for at least 50% of the reduction with the balance as rent deferrals.
Repay deferred amount - Rent deferred must be repaid over the balance of the lease term, with a minimum of 12 months. For example, for a 3-year lease term balance, the tenant has 3 years to repay the deferred rent. For a 3-month lease term balance, the tenant has 12 months to repay the deferred rent.
No Repayments yet - 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.
No Interest - Landlords cannot charge interest on waived or unpaid rent.
Can’t use Bond - Landlords cannot make claims on bank guarantees or security deposits for tenant breaches.
Lease Extensions - Tenants and landlords can agree to rent waivers in exchange for lease extensions.
No rent increases - Landlords must 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.
Pass on Savings - 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.
No Penalty for closing - Penalties for tenants who stop trading or reduce opening hours will be prohibited.
Private Agreement - Alternatively, tenants and landlords can negotiate a mutually agreed outcome.
The Plight of the Landlord
It will be extremely difficult for many property owners to shoulder the financial burden without some relief at the other end of the scale. Banks must provide support to landlords and are doing so already, with repayment moratoriums and reduced interest costs.
When does it come into force?
Each State and Territory Government will be responsible for legislating changes to implement the code. The announcement is not law yet and may be tweaked during the process. Suffice to say that the intention is clear and that landlords need to budget for the worst.
If you need assistance is re-forecasting you cashflows to comply with the code, or just need help on any of the other government COVID-19 incentives, contact Noel or Amanda on 03 9585 7555 or email firstname.lastname@example.org