Lease and rental agreements: key points
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 you below:
National Approach to Commercial Leases
Yesterday, the National Cabinet agreed to a Mandatory Code of Conduct (‘the Code’) for commercial tenancies to ensure that both landlords and tenants share the burden of Covid-19.
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
The Code applies to businesses whose turnover is less than $50 million and who are eligible for the JobKeeper program.
The Code outlines 14 Leasing Principles. Key takeaways outlined in the Code include:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- 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 UNLESS the tenant waives this requirement. 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, having regard to the Landlord’s financial ability to provide such additional waivers.
- 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.
- 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.
- 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.
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 it come into effect?
Each State and Territory will determine a date after 3 April 2020 for the Code to take effect in that State or Territory.
Queensland 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
What does this all mean for you and your business?
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.
Ash and Romy had a chat earlier this week while working from home about what this means for businesses and people who are finding it difficult to pay rent through this season. If you missed the chat, you can watch this video here: https://www.youtube.com/watch?v=82swY3N0mpk
Five useful points to consider are:
1. Start talking early:
- Make it personal. They are human too and many are reasonable people.
- If you are a good tenant, it is in the landlord’s interest to keep you over the longer term.
- 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. Be armed with facts and evidence:
- Work out what the market rent to turnover is for your industry (your accountant can provide you with industry information like this). For example, a hospitality business may have a ‘10% rent to turnover’ ratio. You can then work out how much rent you would be able to pay in order to keep within that ratio with your reduced turnover. Being armed with this proposal when you begin negotiations shows you have considered things logically and you are being reasonable.
- Provide videos, pictures and records of your daily turnover. Some landlords may not be aware of the impact of the impact of Covid-19 ‘on the ground’ in your area or business. For example, one of our client’s landlord’s believed that because the client could still provide a takeaway service, the business would be fine. Only when our client sent the landlord videos of the premises showing that the normally very busy street is now completely empty did the landlord realise how difficult it was for our client to even sell takeaway options.
- Ensure that any agreed reduction will not result in breach of your agreement either now or later.
3. 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 you 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.
4. Formalise your negotiations:
- Once you reach an agreement, make sure that it is formalised properly.
- 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 8 April 2020.
As always, our friendly team are available to you by phone or email if you have any queries.
Stay Safe! Brandon & Gullo Team