Posted on Thursday, April 9th, 2020 in by Matt Garmony
In response to the COVID-19 global pandemic The Federal Government has legislated the Mandatory Code of Conduct for Commercial Leasing Principles during COVID-19 (Code) which imposes a set of ‘good faith leasing principles’ to eligible businesses.
The Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s ‘JobKeeper’ programme.
The JobKeeper programme is a wage subsidy programme and is designed to cover the cost of employee’s wages to support employees and businesses significantly impacted by the Coronavirus. To be eligible, businesses have to prove to the Australian Tax Office (ATO) that their business, which has an annual turnover less than $1 billion, has suffered or is likely to suffer a fall in turnover of more than 30%.
The Objective of the Code “is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords.” These temporary bespoke arrangements are to take into account the particular circumstances on a case-by-case basis. Our licensed valuers and expert property consultants can assist with the negotiation process, providing independent, expert advice.
Our licensed valuers are of the opinion, any agreements relating to rental relief measures should be properly documented by way of a short form deed of variation to lease, to provide clarity on the agreement and avoid disputes at a later date. The ‘deed’ should cover the agreed terms and include the rent relief measures, consideration of outgoings, the period of relief and an ability to extend the period of relief due to the uncertain time frame.
The Mandatory Code of Conduct for Commercial Leasing Principles during COVID-19 mandates that “Landlords and Tenants will act in an open, honest and transparent manner and each will provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the Code. These agreed arrangements will take into account the impact of COVID-19 on the tenant, specifically relating to revenue, expenses and profitability. The Code states, “Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period.”
The temporary arrangements under the Code must adhere to the Leasing Principles;
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- Tenants must remain committed to the terms of the lease, subject to any amendments to their rental agreement negotiated under the Code.
- Landlords must offer proportionate reductions in rent payable in the form of waivers and deferrals, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- Rental waivers must be at least 50% of the total reduction in rent payable under principle #3 above.
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- Any reduction in statutory charges or insurance will be passed on to the tenant on an proportionate basis.
- A landlord should seek to share any benefit it receives due to deferral of loan repayments, with the tenant in a proportionate manner.
- Landlords should where appropriate seek to waive recovery of any other expenses (or outgoings payable) by a tenant, under the lease terms, during the period the tenant is not able to trade.
- If negotiated arrangements necessitate repayment, this should occur over an extended period in order to avoid placing undue financial burden on the tenant after the COVID-19 pandemic and a reasonable recovery period.
- No fees, interest and charges can be applied to rent waived or deferred.
- Landlords must not draw on tenant’s security for non-payment of rent during the COVID-19 pandemic and a reasonable recovery period.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of rent waiver and/or deferral period outlined in #2 above.
- Landlords agree to a freeze on rent increases during of the COVID-19 pandemic and a reasonable recovery period, not withstanding any arrangements between the landlord and the tenant.
- Landlords may not apply any prohibition period or levy penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
The Mandatory Code of Conduct for Commercial Leasing Principles during COVID-19 comes into effect from the date following 3 April 2020 and for the period during which the Commonwealth JobKeeper program remains operational.
What does this mean for Landlord’s, Tenants and Licensed Valuers?
To maintain transparency in the negotiation process, our licensed valuers would recommend both landlords and tenants obtain assistance from their accountants in providing up to date and if possible, an interim audit of financials, to prove the effects of COVID-19 on their businesses and any likely arrangements on each party. Our valuers can assist with the negotiation process.
Both parties are expected to engage cooperatively to achieve a balanced outcome for both, however in our experience landlords and tenants often experience difficulties in coming to an agreement, particularly at market rent reviews, and therefore there is the option to engage the Small Business Commissioner to mediate any disputes or apply to the State Administrative Tribunal. Our licensed valuers have prepared valuation reports for clients to assist them with dispute resolution processes.
Often Landlords rely on rental payments to cover the cost of the property (outgoings, including rates and taxes), payment of mortgages or as an income source. Likewise for Tenants, rent is often one of the major expenses for a business leasing a premise.
Advice to Landlords
Landlords need to be mindful of the financial effects of terminating a lease or the tenant being unable to meet rental repayments during the COVID-19 pandemic and recovery period. If the tenant is unable to pay rent and any arrears after the COVID-19 period, and the premise becomes vacant, not only will the Landlord receive no rental income, they will have no one covering the cost of the property’s outgoings. In these uncertain times, we are of the opinion there may be a limited number of businesses looking to enter into a new lease agreement (there may be a few exceptions) during the COVID-19 Pandemic and therefore it is likely that the premise will remain vacant during this period. When the market rebounds, there is likely to be an extended leasing up period after the pandemic, where the landlord will receive no rent or outgoings. In addition to this, there will be a leasing fee and advertising costs paid to a real estate agent, the landlord may have to grant an incoming tenant a leasing incentive by way of a rent free incentive and may also have to undertake some capital works or refurbish the premise to entice new tenants. All this comes at a cost to the Landlord which can often add up to well over a years rental income.
Advice to Tenants
A tenant’s premise and lease tenure, often adds value to the tenants business, particularly for locational specific businesses. Often tenants spend a significant amount on fitout, which is likely amortised over the term of the lease. Location reliant and local customer focused businesses rely on repeat customers, reputation and word of mouth, which often takes time to build up. Therefore it is often important for tenants to stay in the same location in order to maintain their customer support and patronage which adds value to their business. If a rental reduction and waiver is required during the COVID-19 period, it may be a good time to negotiate further options periods in your lease to add value to your business and give tenants extra time to repay any deferred rent.
What options do Landlord and Tenants have?
We are of the opinion, it may be in both parties’ best interest not to terminate the lease and instead enter into a written agreement for rent abatements or rental reductions during the COVID-19 pandemic. Our Licensed Valuers have prepared numerous market rental valuations and have provided property consultancy advice to both landlords and tenants regarding rental agreements and can assist parties in these extraordinary circumstances to achieve a beneficial outcome to both.
Licensed Valuers assistance
The Mandatory Code of Conduct for Commercial Leasing Principles during COVID-19 has imposed a set of “good faith” leasing principals to assist Landlords and Tenants with rental relief agreements for financially impacted businesses. The licensed valuers at Garmony Property Consultants have the knowledge and experience to assist you with commercial and retail market rental valuations and provide you with consultancy advice. Our professional valuation reports provide the reader with a clear and concise understanding of exactly how and why the valuer has arrived at the market rental which is supported by relevant comparable rental evidence and methodologies. Please call us and speak to one of our licensed valuers to see if we can assist with any rental dispute or matter.
Find a copy of The Mandatory Code of Conduct for Commercial Leasing Principles here 200407 national-cabinet-mandatory-Mandatory Code of Conduct commercial-leasing-principles