Are you confused about what rights and responsibilities you have as a commercial lessor (Landlord) in the event of rent non-payment due to COVID-19? You’re not alone.
In April 2020, the Federal Government released a mandatory code of conduct for commercial leasing (the Code). At the time of writing, New South Wales has just made the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the Regulation). We will address the Regulation below however the State legislation will not override the central rules of the national Code. Many commercial lessors are anxious about widespread non-payment of rent given the safeguards offered to tenants by the Code.
O’Hearn Lawyers is currently working with a number of commercial lessors to assist in navigating this difficult time through compulsory ‘good faith’ negotiations with tenants and thorough analysis of the national Code. If you have any of the following questions contact us today to discuss your situation. More generally, this article answers the following questions that may be helpful if you are a commercial landlord in need of information:
- Does the Code apply to me?
- What can I do to comply, but also protect my interests?
- How do we define the end of the pandemic period?
- The term ‘trade’ hasn’t been defined, how do I request proof of business downturn from my tenants?
Does the Commercial Rent Relief Code apply to me?
The Code applies to all tenancies that are eligible for the Commonwealth Government’s JobKeeper programme and who have an annual turnover of up to $50 million. If the Tenant is a part of a Franchise, then the annual turnover relates to the individual Franchisee. For retail corporate groups, the annual turnover is determined at the group level (rather than at the individual retail outlet level). If a tenancy falls outside of the above criteria, there is a Government expectation that the principles of the Code should nevertheless apply “in spirit” and consideration should be given to the size and financial structure of the affected business.
The Code – ‘SME Commercial Leasing Principles During COVID-19’ – In Plain English
- You cannot evict a tenant for not paying rent during the COVID-19 pandemic.
- You cannot draw on tenants’ security due to rent non-payment during the pandemic.
- You must reduce the amount of rent in proportion to the tenants’ reduction in trade in the form of waivers and/or deferrals.
- Tenants must still fulfil their lease obligations (except those regarding rent payments where covered by the Code) and failure to do so may forfeit the protections outlined in the Code.
- Lessors must pass on the benefits of concessions such as land tax or council rate reductions to the tenant.
- Rent increases are frozen during the pandemic period.
- The “pandemic period” means the period of time when the JobKeeper program is operational.
Waiver vs Deferral: How Much Rent Do My Tenants Pay Under The Code?
While there are significant rent protections afforded to tenants under the Code, the overarching principle of good faith in negotiation applies to the tenant as well as the lessor. The Code doesn’t allow the tenant to simply wipe all rent responsibilities. Any reductions in rent in either the long term through waivers (complete non-payment of a percentage of rent) or deferrals (paying a percentage of rent later) only apply to the percentage of rent that matches the percentage decrease in trade of the lessee.
The Code stipulates that at least half of the tenants’ rent (adjusted proportionally to their loss in trade) has to be waived, and the remaining rent is deferrable and paid back to the lessor in instalments over a period of at least 24 months from the date of the end of the pandemic period. The Code offers an example to clarify this rule:
Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis
- ie. 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 in a manner that is negotiated by the parties.
- So 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.
Negotiation Between You and Your Tenants
One of the key areas where O’Hearn Lawyers can assist our commercial lessor clients is in the navigation of tenancy negotiations. The Government has emphasised the need for ‘good faith’ negotiations between landlords and SME tenants. While commercial lessors are committed to the mutual goal of supporting business survival during the pandemic, the details of how to fulfil some aspects of the Code are unclear.
For example, the waiver or deferral of rent is dependent on the reduction in trade experienced by tenants. Many lessors are unsure how to request evidence of this downturn and how much information regarding their tenant’s business accounting they are permitted to request access to.
Tenants also have an obligation under the Code to “remain committed to the terms of their lease”. There is significant confusion about the definition of these obligations in regard to the continuation of business and lease terms afforded to business through government stimulus payments such as payroll tax relief, JobKeeper support and one-off cash stimulus payments.
To protect your financial security while meeting your obligations to tenants under the national Code and for support in navigating the legal implications of the code, contact O’Hearn Lawyers today for a confidential consultation.
As well as supporting you through negotiations with lessees, O’Hearn Lawyers can also work in collaboration with your accountant and other business stakeholders to achieve the best outcome for your ongoing prosperity.
So what is in the New South Wales Retail and Other Commercial Leases (COVID-19) Regulation 2020?
The Regulation gives State legislative effect to the Federal Code, without expanding on it in particular detail.
Accordingly, the Code and the Regulation should be read together whilst negotiating and working towards an agreed outcome.
There remain some areas of uncertainty in relation to the Code and Regulations (for eg. what documents are required for providing proof of loss of revenue), however O’Hearn Lawyers can assist by ensuring compliance based on up to date legal reviews and working towards positioning the business as best possible for the post pandemic period.
The material included in this website is produced by O’Hearn Lawyers Pty Limited. It is designed and intended for general information purposes only. The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. You should seek legal advice or other professional advice in relation to any particular matters you or your organisation may have.