COVID-19 changes to commercial and retail leases
WHO SHOULD READ THIS
- Landlords and tenants of commercial or retail properties in Australia. Particularly those who are about to negotiate upcoming rental payments or take action for a lease default.
THINGS YOU NEED TO KNOW
- The National Cabinet have agreed on a national code of conduct to regulate commercial leases during the COVID-19 pandemic ‘emergency period’.
- The States and Territories are expected to implement legislation and regulations to enact the principles of the Code shortly.
WHAT YOU NEED TO DO
- We recommend both landlords and tenants take proactive steps and develop action plans now.
- If you are a landlord, know your finances well. You will need to make concessions and have a good understanding of how much relief you can provide. Ask to see what mitigation strategies the tenant has pursued before you grant the rent relief. Confirm the tenant has applied for the JobKeeper program and ask to see their turnover records to ascertain their true financial position. If the Code applies to your tenant you will need to know the tenant’s loss of turnover when negotiating the proportional rent relief.
- If you are a tenant, you should know your financial position well and be prepared to share it with your landlord to facilitate rent relief proportionally to your diminished turnover. Seek to obtain all government assistance available to your business and notify your landlord of the steps you have taken to mitigate your losses.
- Make sure any concession, amendment or agreement is always documented in writing (and is binding as appropriate). At this stressful time, it is important to ensure any agreements made are binding and no issues are missed.
A significant number of stimulus packages have been announced by Federal, State and Territory governments collectively offering $billions through various schemes and programs. In support of this, the National Cabinet have been meeting and agreeing on principles to regulate commercial and retail leases during the COVID-19 emergency period.
These meetings have culminated in announcements of various principles that seek to regulate commercial and retail leases to ensure small and medium sized businesses ($50 million annual turnover or less) remain viable.
Significantly, on Tuesday 7 April 2020, The National Cabinet, industry stakeholders and special interest groups have agreed on a national code of conduct (Code) for the States and Territories to enact to regulate commercial leases during the COVID-19 pandemic ‘emergency period’.
The States and Territories are still yet to implement legislation and regulations on this Code, however we expect this to occur very soon now that the Code has been released. It has been suggested that Queensland parliament will meet week commencing 20 April and it is anticipated that this will be on the agenda.
A summary of the final agreement is set out below:
The national Code
- The Code will operate to form part of the Prime Minister’s ‘business hibernation’ plan. It gives relief and protection to small and medium sized businesses that:
a) have an annual turnover of $50 million or less;
b) are experiencing at least a 30% reduction in turnover; and
c) are eligible for the JobKeeper program.
- The Code includes the following principles:
a) rent relief must be given to eligible small and medium businesses in proportion to their reduced turnover;
b) the amount of relief will comprise two elements:
- a rent waiver equivalent to at least 50% of the relief amount (calculated proportionally to the reduction in turnover); and
- the balance of the relief amount provided by deferred rent payments, with the following terms:
– the deferred rent becomes repayable after the 6 month emergency period ends and is repayable over the remaining term of the lease; and
– if the remaining term is less than 24 months, the deferred rent is payable over 24 months.
Practically, where leases have less than 30 months remaining from the date the new legislation is implemented, a landlord may need to consider their security from the tenant for any deferred rent that remains payable after the lease expiry.
- Good faith negotiations to be observed;
- State and Territory mediation and conciliation dispute resolution mechanisms will create legally binding resolutions;
- if a tenant and landlord reach an agreement to vary or amend their lease under the protection of the Code, the tenant loses their extraordinary right to terminate the lease that was previously announced on 29 March 2020;
- landlords may not increase rent during the emergency period; and
- landlords may not evict tenants for non-payment of rent during the period.
The Prime Minister has made it abundantly clear he expects Australian landlords and tenants to sit together at the table and negotiate a mutually agreeable variation to their commercial leases. For all intents and purposes, this also appears to be his message to those businesses who do not fall under the protection of the Code.
Where the parties are negotiating an amendment or variation under the Code, they will be required to do so in contemplation of the ‘proportionality principle’.
As outlined at 2(b) above, the Code is prescriptive in how landlords must provide relief to eligible businesses.
Land tax and other relief for landlords
To assist ease the burden that compliance with the Code will place on landlords, the States and Territories have agreed to consider providing land tax relief to retail and commercial landlords who provide relief to tenants in the terms provided for by the Code.
Queensland has announced a three month land tax rebate for the 2019-20 year and a three month deferral for the 2020-21 year for landowners who meet certain criteria. The Queensland announcement provides that businesses will be eligible for the land tax relief even if the lease is not subject to the Code but proportional relief is provided to the tenant regardless.
New South Wales announced $440m in land tax relief split evenly across residential and commercial sectors. Similarly to Queensland, the relief will be provided to landlords who apply and meet certain criteria including that they are providing relief to tenants in the terms provided for by the Code. The New South Wales policy will only apply to those business tenants who meet the eligibility requirements of the Code (<$50 million annual turnover and 30% or greater reduction in revenue).
The Code requires landlords and tenants to negotiate in good faith to achieve a mutually acceptable outcome. Where an outcome cannot be mutually agreed, the State and Territory legislation will utilise legally binding mediation to assist the parties in forming an agreement. Failing a successful mediation, the tenant will have the extraordinary right to terminate the lease.
Ultimately, we are still waiting for the State and Territory legislatures to pass legislation giving legal affect to the Code. More clarity will be provided once the legislation has passed.
Our team has been working with clients to assess what their unique position is, and what the following days may hold for them. Our primary recommendations are:
- know your finances well, you will be asked to make concessions and will need to know how far you can actually yield;
- if you are the landlord, ask to see the tenant’s application to the JobKeeper program and their turnover records to ascertain their true financial position (this is required to implement the proportionality principle for a rent reduction regardless);
- be willing to give something in return for what you are asking for, e.g. sign an extension, give a rent free month. The aim of the game is ensuring tenants can open the doors in six months’ time;
- negotiate in good faith;
- if you are the tenant, use best endeavours to mitigate losses. Otherwise, you may not be afforded protection under the Code; and
- make sure any concession, variation, amendment or agreement is contemporaneously recorded in writing. Although this sounds obvious, sleepless nights and high anxiety levels in the retail and commercial space can mean people are making quick handshake deals to relieve the stress.
As each lease and circumstance is unique, it is important to review and consider the terms of each individual lease. For more information on this, please contact our team below.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.