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COVID-19 and COMMERCIAL TENANCIES SUCCESSFULLY NEGOTIATE WITH YOUR LANDLORD

The Introduction and Purpose of the Mandatory Code of Conduct

On the 3rd April 2020, the National Cabinet met and agreed to a Mandatory Code of Conduct (Code) for rental waivers and deferrals for commercial tenants suffering from the impact of the Covid-19 virus. 

The purpose of the Code is to impose a set of good faith leasing principles for commercial tenancies (including retail, office and industrial) between landlords and tenants, in circumstances where the tenant is a small – medium size business with an annual turnover of up to $50 million and is an eligible business under the Government’s JobKeeper program.

The $50 million annual turnover threshold will be applied in respect of –

  • franchises at the franchisee level and
  • retail corporate groups at the group level (rather than at the individual retail outlet level)

Tenants who satisfy both the turnover threshold and the JobKeeper payment program are automatically considered to be in financial distress under the Code.

The National Cabinet agreed that there would be proportionate rent reductions based on the tenant’s decline in turnover, so as to ensure that the burden was shared between landlords and tenants.  Whilst the Code is mandatory, it still allows tenants and landlords to agree to tailored, bespoke and appropriate temporary arrangements to take into consideration individual circumstances.

The Code applies from the date that each individual State passes its legislation (after the 3rd April 2020 and is to be retrospective to the 3rd April 2020) and will continue for the life of the JobKeeper program.

 In addition, the National Cabinet noted they expected the banks and other financial institutions to also support landlords and tenants with appropriate flexibility.

 
Overarching principles

The following provides a guide to the arrangements mandated by the Code: -

  • Landlords and tenants are expected to work together to ensure business continuity and to facilitate a resumption of normal business activity at the end of the Covid-19 pandemic and during a reasonable recovery period thereafter.
  • Landlords and tenants are expected to discuss and negotiate appropriate leasing arrangements to achieve a satisfactory working relationship between each.
  • Landlords and tenants are expected to negotiate in good faith.
  • Each party is to act in an open, honest and transparent manner and provide sufficient and accurate information as to each other’s businesses in order to facilitate the outcome envisaged by the Code.
  • The agreed arrangements need to take into account the impact of the Covid-19 pandemic on the tenant, having regard to the tenant’s revenue, expenses and profitability and any such arrangements are to be proportionate and appropriate based on the impact of the Covid-19 pandemic plus a reasonable recovery period.
  • The parties are to assist each other in dealing with other stakeholders including Governments, utility companies, banks and other financial institutions.
  • All leases must be dealt with on a case by case basis taking into consideration whether the tenant has suffered financial hardship due to the Covid-19 pandemic, and the remainder of the term of the tenant’s lease and whether or not the tenant is the subject of insolvency arrangements.

 
Leasing principles

The following principles need to be applied on a case by case basis when negotiating appropriate temporary arrangements under the Code:

1.  Landlords must not terminate leases due to non-payment of rent during the Covid-19 pandemic period or a reasonable subsequent recovery period

2.  Tenants have to abide by the substantive terms of their lease (other than the rental arrangement negotiated), failing which the tenant will be in breach of their lease and will not be protected by the provisions of the Code.

3.  Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals up to an amount of 100% of the rent ordinarily payable, on a case by case basis, based on the reduction in the tenant’s trade during the Covid-19 pandemic period and a reasonable recovery period thereafter.

4. Rental waivers must constitute no less than 50% of the total rent reduction in rent payable under principal 3 above during the Covid-19 pandemic period.  Regard needs to be had to the landlord’s financial ability to provide additional waivers. Tenants may waive the benefit of the 50% minimum waiver by agreement.

5. Rent deferrals must be amortized over the balance of the lease term or for a period of not less than 24 months, whichever is the greater, unless agreed between the parties.

6. If the landlord obtains the benefit of a reduction of any statutory charges such as land tax, council rates, insurance etc, such reduction must be passed to the tenant in the appropriate proportion applicable under the lease.

7. Landlords should share any benefit they receive by way of deferral of loan payments in a proportionate manner.

8.  Landlords should, where appropriate seek to waive the recovery of any other expense or outgoing payable by a tenant under lease terms during the period the tenant is not able to trade. Where they are able to, landlords are able to reduce services as required in such circumstances.

9. No repayment of any negotiated arrangement should commence until the earlier of the Covid-19 pandemic ending, or the existing lease expiring, taking into account a reasonable subsequent recovery period.

10. No fees, interest or other charges should be applied by a landlord against a tenant in respect to any rent waived or deferred.

11. Landlords must not draw on any security bond paid by the tenant for non-payment of rent under the lease during the Covid-19 pandemic and a reasonable recovery period thereafter.

12. The tenant should be given an opportunity to extend their lease for an equivalent period of the rent waiver and/or the deferral period. This is intended to provide the tenant with 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 those retail leases where the rent is based on turnover.

14. Landlords are not able to apply any prohibition or levy any penalties if the tenant reduced opening hours or ceases to trade during the time of the Covid-19 pandemic.

 

Mediation

Where landlords and tenants cannot reach agreement on temporary leasing arrangements under the Code, the matter should be referred and subjected to applicable state or territory retail/commercial leasing dispute resolution processes.

Examples of the application of the Principal of Proportionality

I refer you to the slide which is an example provided under the Code.

Qualifying tenants are provided with cash flow relief by a reduction in payment of rental in proportion to the loss of turnover they have experienced from the Covid-19 crises.

If a tenant suffered a 60% loss in turnover, this would result in a guaranteed 60% rent relief.

At a minimum half of that 60% would be provided as a rent free/waiver for the proportion by which qualifying tenant’s revenue has fallen.

Half of that reduction could be through a deferral of rent, to be repaid over at least 24 months.

If the tenant’s revenue has fallen by 100% (for example if the business has had to close) than at least 50% of the total cash flow relief would be rent free/rent waiver and the remainder is a rent deferral.

The parties are free to make an alternative commercial arrangement to this formula if that is their wish.

 

How to negotiate with your commercial landlord

Access government assistance

  • Tenants should attempt to access any and all government assistance available to them before negotiating rent waivers or deferrals.
  • There are cash flow boosts available, increases to the instant asset write off provisions and wage subsidies available through the JobKeeper payment scheme.

 

Adjust your business model

  • Tenants need to adjust their usual business operations in order to stay afloat. Try and think of opportunities to generate other sources of revenue to generate cash flow.

 

Negotiate in good faith

  • In my opinion the key to a successful negotiation by a tenant when dealing with a landlord is not confrontation, but good sound financial reasoning and an understanding that you the tenant are dealing with a party who is not under the same financial pressure as you the tenant, and therefore will not be approaching you to discuss rent reduction, but rather waiting for you the tenant to approach them.
  • Attached is a slide that I obtained from “Smart Company” which shows the “Awareness Lag” between you as the tenant, your staff and your landlord.
  • Landlords will not take the situation as seriously or urgently as you the tenant will as they are not, initially at least, under the same financial pressure as their tenants (subject of course keeping in mind that they may have loans and need to make mortgage payments).

 

Communicate clearly and early

  • Communication is all important. Landlords are not going to approach tenants and offer rent reductions. They are going to wait for the tenant to approach them. It is also unlikely that they will want to have a face to face meeting but rather would require any such request to vary the rent to be made in writing.
  • Approach your landlord with an open mind and a willingness to work with the landlord and try to find a happy medium whether that is deferred rent, rather than rent free or a percentage of the rental liability.
  • The earlier this communication begins, the more likely it is that the parties will reach a satisfactory resolution.

 

My advice is that the tenant’s letter should contain the following points: -

  •  Point out to the landlord that your business has been ordered to cease trading by the Government because of the Covid-19 containment (or that your business has suffered a severe downturn in trade as a consequence of the Covid-19 pandemic).
  •  Up to this point your business was solvent and trading well and that you have been a good tenant.
  •  That you wish to be around and trading in the long term.
  •  You’ve undertaken steps to reduce expenses as much as possible to conserve cash.
  •  You have attempted to take advantage of government incentives.
  •  That you are tyring to work out other ways to generate cash flow to stay afloat and detail what you are doing.
  •  The Prime Minister has requested that landlords and tenants negotiate in good faith and that is what you are trying to do.
  •  That you are seeking a rent-free period of at least six months to be reviewed once the pandemic shut down has ceased, or alternatively a reduction in rent based on a downturn in trade, and then payment of a proportionate amount of rent for a period of time thereafter to enable your business to recover.
  •  Your aim is to resume your position as a stable tenant once you are able to continue to trade.
  •  Neither the landlord nor you as the tenant will benefit if the business ceases to trade and the landlord is left with a vacant tenancy.

 Tenants should not try to take advantage of the Covid-19 pandemic situation and expect that they can continue to occupy their premises and continue to trade rent free.  Tenants should keep in mind that landlords also have fixed costs that they must meet.

 When negotiating a rent reduction do not forget to include a waiver or reduction in payment of outgoings.

 

Maintaining occupancy

 

An occupied commercial property is the best result for both parties as it means the tenant and their business are in the best position to survive the downturn while for the landlord it means they are generating some rental income. There is nothing worse for a landlord than vacant premises.

 

What if a landlord won’t negotiate ?

 

The Code provides that a landlord cannot evict a tenant during the Covid-19 pandemic period and also provides that where landlords and tenants cannot reach agreement, the matter needs to be referred to the applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation.

Just remember, landlords need tenants and tenants need landlords.

 Landlords are in fact in business with the tenant and they need you the tenant to remain solvent and viable in order for them to maintain tenants within their complex and not be left with vacancies which they cannot fill.

 

Bottom line take aways:

1.  Landlords cannot refuse requests for rent relief to SME tenants who are eligible for the JobKeeper scheme. Waivers and deferrals will be negotiated individually but must follow the provisions of the Code.

2.  Only businesses eligible for JobKeeper payments can negotiate under the Code.

3.  A landlord cannot evict a tenant for non-payment of rent during the pandemic period, and must comply with the eviction moratorium, which is currently estimated to be a six month period.

4.  Rent increases are frozen throughout the pandemic period as have all additional penalties.

5.  Binding mediation is the solution if parties cannot agree. Each state has a different mediation procedure.

Good luck in your negotiations and let’s hope we all come out of this the other end a lot wiser, although probably a lot financially poorer.

Gerry Epstein

Partner

Steindls Lawyers & Notary

07 55709500

gepstein@steindls.com.au

www.steindls.com.au

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