The National Cabinet’s mandatory Code of Conduct for commercial tenancies (Code), released on 7 April 2020, aims to impose a set of good faith leasing principles for negotiations between landlords and tenants. Specifically, the Code relates to measures the two parties can agree on and implement to alleviate financial stress and hardship stemming from the COVID-19 pandemic. The code will be legislated by the States and will be mandatory.
To be eligible you need to have a turnover of less than $50 million AUD be eligible for the JobKeeper rebate (ie be able to demonstrate at least a 30% decline in revenue).
- Landlords must not terminate leases for non-payment of rent & tenants need to continue to comply with lease obligations. Interest and charges cannot be applied to accounts.
- Landlords must freeze rent increases for the period of the pandemic and a reasonable period afterwards.
- Landlords must pass on rent reductions proportionate to the turnover reduction of the tenant.
- It is important not to overlook outgoings attached to a lease during the negotiations. Landlords must also consider any reductions in statutory amounts such as land tax, rates along with other outgoings during the negotiation process.
Let’s assume a tenant has had a reduction in income of 60% and they normally pay $5,000 a month in rent. They could expect a proportionate reduction in rent.
In this example they would be expecting a $3,000 proportional reduction.
As the code stands at least 50% of the reduction needs to be provided as a complete waiver of rent, ie rent-free. And no more than 50% provided as a deferral of rent over a minimum of 24 months.
This would mean $1,500 of rent would not be payable by the tenant, and the $1,500 would be amortised over a minimum 24 month period.
During the negotiation, its important to ensure that any repayment of the deferred rent does not compromise the ability of the tenant to recover from the crisis.
How to go about it
- Open the lines of communication with your landlord ASAP
- Put your request (including the basis for your requested reduction) in writing
Hi Commercial Landlord,
Our business has been ordered to cease trading (or other impact as appropriate) by Federal and State governments due to COVID-19.
Until this point our business was solvent, well-managed and a stable tenant.
We have instituted emergency cash conservation measures across our business, (include some examples)
We now seek your support under the recently announced Commercial Tenancies Code to provide rent relief to our business in the form of a x% reduction in our rent and outgoings in line with the reduction in our revenue due to COVID-19.
This will allow us to resume our position as a stable tenant once our business returns to normal.
We appreciate your ongoing support during this crisis and look forward to working through it with you.
Please contact me to discuss the situation at your earliest convenience.
- Pay your proposed reduced rent for April on the due date even if you don’t hear from the landlord as a gesture of good faith.
- When negotiating, avoid a deferral of rent wherever possible. The code required any reduction to be at least half discount / half deferral. Obviously a discount now is better than deferring the problem until later.
- Don’t forget to include outgoings (ie rates, land tax, parking etc) in your negotiations
- Do it ASAP
What if they won’t negotiate
- If the landlord is unwilling to negotiate with you, remind them of the Commercial Tenancies Code which has just been released.
- Take the high ground. Pay (if possible) what you believe is reasonable in line with the Code, and document all your negotiations in writing.
- Continue to communicate with them
There is a ban on evictions for the next 6 months, so it’s in everyone’s best interest to work together and comply with the code. A tenant that survives this crisis and who can return to being a stable business who is able to meet their lease obligations is a far better outcome for a landlord, then no tenant at all.
Think about the future
- Now may be a good time to consider your future plans. How long is left on your lease? What are your space requirements going forward?
- The commercial tenancies market is likely to be very different post COVID-19, so be open to all possibilities. This crisis may end up being an opportunity to find a more suitable premises instead.
You should speak to your accountant and lawyer if you have any questions on the Commercial Tenancies Code, how it impacts your business and what your future plans might be.