- Relief available to tenants eligible for JobKeeper (i.e. able to evidence reduction in revenues of 30%+) who have revenues of less than $50m
- Rent relief to be provided by landlords proportionate to tenant’s loss in revenue
- Relief to be provided in the form of waivers (at least 50%) and the remainder in deferrals
- Landlords must not terminate leases
- Tenants must honour lease terms over time
- Landlords are encouraged to seek bank mortgage relief such that loan repayments can be deferred for up to six months – further relief on land tax and rates also to be made available.
The Government’s Code of Conduct regarding Commercial Leasing arrangements for small to medium businesses is now mandatory, following the Prime Minister’s announcement yesterday afternoon.
The announcement has been presented as the final piece to the puzzle in Morrison’s “hibernation strategy” – allowing businesses to curb all major costs and fixed overheads, seeing them through to the end of the virus when they can resume normal operations. With tax payments, bank loans and wages (JobKeeper) addressed, yesterday’s announcement refers to rent on commercial premises.
As with all such announcements, details are still emerging, but here is a summary thus far.
The relief will apply to commercial tenancies (including retail, office and industrial) where the tenant is eligible for the JobKeeper program.
Eligibility for the JobKeeper program has been detailed in my previous post – and is being finalised in Parliament today – but broadly refers to a client that is in distress given the COVID-19 pandemic via loss in revenues of 30% or more (15% or more for not-for-profits), relative to a “comparable period”.
For most businesses, a comparable period would refer to the same month or quarter in the prior year, but will be subject to the tax office’s discretion where the prior period comparison is not appropriate – for example, entities that were not trading last year, are pre-revenue or whose revenue patterns are irregular.
Additionally, tenants must have group revenues of less than $50m to be eligible for relief.
It is understood that these arrangements will be in place for the duration of the JobKeeper programme, at this stage being until 27 September 2020.
How it will work
The Prime Minister and state premiers have agreed to the mandatory code of conduct, but it will be legislated / implemented by the states and territories, which will have their own eligibility guidelines.
The mandatory code will require landlords to reduce rent charged to tenants in proportion to their loss of revenues and do so via waivers, deferrals and lease extensions. In effect, this means that some landlords will be compelled to reduce their tenant’s rent obligations to NIL for the relief period.
It is the intent of the Code that the two parties share the financial burden of the pandemic and that the rent relief enables tenants (and any sub-tenants) the ability to remain solvent. Conversely, the negotiations must be in good faith, with the tenant honouring their agreed lease terms over time.
The Government’s Code of Conduct details the overarching principles in which landlords and tenants must negotiate their new arrangements, with an emphasis on working closely together towards a shared goal.
The Code requires landlords to apply the following as soon as practicable and without delay:
- Proportionate reduction in rent obligations in the form of waivers and deferrals, up to 100% of the amount ordinarily payable.
- The requirement is for rent waivers to constitute at least 50% of the reduction and ideally more (depending on the Landlord’s ability financially to offer additional waivers).
- 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 must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
Further detail is available within the Code and we expect further information to be released by each of the states in the coming days.
Guidance for landlords
The announcements, of course, seem very much tipped in favour of tenants and little guidance is given for landlords who may have loan commitments and/or rely on rental income for their livelihoods.
At this stage, the best advice for affected landlords remains to seek bank mortgage relief such that future loan repayments can be deferred for up to six months. This deferment does not represent a waiver or discount but will provide much needed cash flow relief during this time, and support good faith tenant negotiations.
Additionally, relief from land tax and rates being announced by state governments over the last few days should be considered – I will be writing on this in more detail in a future post.
We will keep you updated as more information is released and if we can be of assistance in clarifying how this could impact you, please let don’t hesitate to contact us.