Lease and rental agreements for Landlords
The Australian Government is working with the States and Territories to limit the economic impacts of Covid-19 on commercial tenancies. With constant updates coming from the Government, we have summarised some key takeaways for commercial Landlords below
NATIONAL APPROACH TO COMMERCIAL LEASES
On 7 April 2020, the National Cabinet agreed to a Mandatory Code of Conduct (‘the Code’) for commercial tenancies (including retail, office and industrial) to ensure that both Landlords and Tenants share the burden of Covid-19 both during the pandemic and during a ‘reasonable recovery period’.
Landlords will be required to discuss relevant issues with eligible Tenants, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes.
You can access the full Code here: https://www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf
Does the Code apply to me?
The Code applies to Landlords in respect of each commercial tenant with a turnover less than $50 million and who are eligible for the JobKeeper program. The Cabinet stated that it is intended that Landlords will agree to tailored, bespoke and appropriate temporary arrangements for each eligible tenant, taking into account their particular circumstances on a case-by-case basis.
Relevant factors for consideration are whether the Tenant has suffered financial hardship due to the COVID-19 pandemic, whether the tenant’s lease has expired or is soon to expire and whether the tenant is in administration or receivership. However, the Government has provided little clarity about how these factors are to be taken into account.
The Code outlines 14 Leasing Principles. Key takeaways for Landlords outlined in the Code include:
Compliance with Lease
- 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 their lease, subject to any amendments to their rental agreement negotiated under the Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
Rent reduction and deferral
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount 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 subsequent reasonable recovery period.
- Rental waivers must constitute at least 50% of the total reduction in rent payable over the COVID-19 pandemic period. Tenants may waive the requirement for a 50% minimum waiver by agreement with the Landlord.
- The waiver should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. In this case, the Landlord’s financial ability to provide such additional waivers must be taken into account.
- Landlords 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 – notwithstanding any arrangements between the landlord and the tenant.
Outgoings and other expenses
- Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
Deferral of Landlord’s loan repayments
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
Recouping rent and charging interest
- Any amount of reduction provided by a waiver may not be recouped by the Landlord over the term of the lease.
- 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.
- No fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferral.
- Landlords must not draw on a tenant’s security for the non-payment of rent during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
Extension of Lease
- The Tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period.
What if my tenant and I cannot reach agreement?
Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.
When will the Code come into effect?
The Code will be given legal effect through relevant state and territory legislation or regulation. Each State and Territory will determine a date after 3 April 2020 for the Code to take effect in that State or Territory. The Palaszczuk Government has announced it will consult with stakeholders on the development of systems and implementation of the code in Queensland.
QLD APPROACH TO RESIDENTIAL TENANCIES
The Covid-19 Rental Grant is available to Queenslanders impacted by the Covid-19 pandemic who do not have access to other financial assistance and whose landlord has not agreed to enter a payment arrangement. The Grant is a one-off payment of up to 4 weeks rent (maximum of $2000) and is paid directly to the landlord. You can access the application form here: https://blarga.hpw.qld.gov.au/OnlineApplication/RentalGrant
Deferral of Land Tax
From 14 April 2020, the Queensland Government commenced offering a three-month rebate of land tax for 2019-20, followed by a three month deferral of land tax 2020-21 for property owners who agree to provide rent relief for tenants affected by the coronavirus downturn.
A landowner can apply for land tax relief if they meet criteria including:
- the landowner rents all or part of a property to a tenant/s OR all or part of a property is currently available for lease; AND
- at least one tenant’s ability to pay their normal rent OR the landowner’s ability to secure a tenant is affected by the COVID-19 pandemic; AND
- the landowner provides rent relief to an affected tenant/s commensurate with the amount of the land tax rebate OR if the property is unable to be leased, the landowner requires land tax relief to meet their financial obligations (such as debt repayments); AND
- the landowner complies with new leasing requirements, even if the relevant lease is not regulated.
To apply go to qld.gov.au/landtax.
What does this mean for you?
Whilst the above is a good starting point and shows that the Government is taking steps to put strategies in place, there is little certainty about the details of how the Government’s strategies will be outworked. At this stage, it is really about having effective negotiations with the goal of entering into a short term agreement.
Five useful points to consider are:
1. Start talking early:
- Make it personal. Your tenants are human too and most are reasonable people.
- If you have a mortgage, talk to your mortgagee about what options they are offering during COVID-19.
- Ensure the common goal is at the forefront of negotiations. We all share the same end goal – get through this season and recommence business as usual as soon as possible.
- Everyone needs to be willing to compromise.
2. Exchange information:
- Ask your tenant to provide details of:
- Their reduction in trade as a result of the COVID-19 pandemic, consistent with assessments undertaken for eligibility for the Commonwealth’s JobKeeper programme. This will form the basis of negotiations for any rent reduction by way or waiver or deferral.
- Any changes to trading hours, use of services and/or outgoings.
- Provide details of the loan, land tax etc and other concessions you have or may obtain.
- Ask your tenant to provide details of:
3. Ensure your Agent is complying with the law
- Some real estate agents are advising tenants who are unable to pay their rent, or who may find themselves in such a situation in future, to consider applying for early release of their superannuation. ASIC has released a statement advising this may constitute unlicensed financial advice and therefore contravene the Corporations Act. Significant penalties apply for contraventions.
4. Know your lease agreement
- Your current agreement may contain terms that will assist you.
- Some key clauses to look for initially include:
- Force Majeure: This clause sets out your rights and obligations if an event occurs outside of the parties’ control and it may be broad enough to include an event like Covid-19.
- Notices: This clause sets out how each party must give notice. For example, if the agreement says you must give notice via post, then email correspondence or text messages may not be binding.
- Dispute Resolution: This clause sets out the steps to follow to resolve a dispute. You may not need to follow these steps yet, but it is important you are aware of your rights and obligations if a dispute arises.
5. Formalise your negotiations:
- Once you reach an agreement, seek legal advice to ensure the agreement does not prejudice your future legal rights and obligations beyond key variations agreed, and make sure that it is formalised properly. It may be more efficient for Landlords to take a legal template approach guided by the principles, with key details to be inserted, including the tenant turnover reduction, and whether that is to be determined on a one-off basis or on an ongoing basis, the amount waived versus deferred, the period of deferment and of any lease extension and so on. Consideration must be given to whether it may be appropriate to register at least some variation terms with Titles Office – such as extensions.
- Balance the need for security and flexibility. The agreement needs to be binding as there is little security or certainty in handshake arrangements and the agreement needs to be flexible to allow for changes as the Government announces further details of its response to Covid-19.
- Make sure that your final agreement reflects any current agreement. For example, your current agreement may state that all parties must sign a new agreement for a reduction in rent to be binding and so a ‘handshake’ agreement confirmed via email will have little effect.
5. Keep on top of Government announcements:
- Sign up for newsletters, check Government websites etc to make sure you are across your options.
- The Federal Government recently released a Covid-19 phone app that has lots of handy information and news available.
- The https://treasury.gov.au/ website has very useful factsheets and all information pertaining to the economic response to Covid-19.
- View our Covid-19 Useful Links page for additional SME assistance.
- You can also watch our Business Survival Guide series via Youtube or Facebook.
Please note that the Government’s approach to Covid-19 is constantly changing and the above comments are current as of 17 April 2020.