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Commercial Rent Waiver Provisions - 14 April 2020


The Federal Government has proposed a mandatory Code of conduct to commercial leases and, at this stage, it is unclear whether it needs to be enacted by the State Government to have effect.  However, whatever steps are required are likely to be given legislative force  in the near future.

For it to affect a commercial tenancy it is required that:

  1. The tenant have a group annual turnover of less than $50m.
  2. They be eligible for the Jobkeeper program.

If they are outside either of these provisions, then the Code would not apply. 

The Code is intended to apply for negotiations in relation to existing lease arrangements and will apply to a qualifying commercial tenant.  In addition to the above requirements, the tenant must be suffering” financial stress and hardship” as a result of the Covid-19 outbreak.  Financial stress and hardship is fairly broadly defined, but includes an individual business or company’s inability to generate sufficient revenue as a direct result of Covid-19 that causes the tenant to be unable to meet its financial and/or contractual commitments.

Please note that if the tenant becomes eligible for the Jobkeeper payment they are automatically considered to be in financial stress and hardship.  It is likely this will apply to many of your tenants.

Code’s principles

It is intended that the parties are to try and reach an agreement between themselves regarding rent relief, waiver or deferral of rent, as required.  There are 11 core principles but, in summary, the main ones to note are:

  • a requirement to negotiate in good faith;
  • a requirement for transparency, including provision of sufficient and accurate information;
  • agreed arrangements for taking in to account the impacts on the specific tenant with regards to its revenue, expenses and profitability;
  • an acknowledgment that the landlord already bears the rent default risk and must not seek to permanently mitigate this risk in negotiating temporary arrangements.

Other factors need to be considered as to whether the lease has expired, will soon expire, if the tenant is in administration or receivership, may be already in arrears, are in a holding over position, etc.

Specific leasing provisions include:

  1. There must not be any termination of leases due to non-payment of rent during the pandemic period, or recovery period (these are not yet defined in sufficient detail, but it is safe to say we are currently in the pandemic period).
  2. The tenant must remain committed to the lease terms subject to any renegotiation. Material failure to abide by substantive terms may forfeit any protections under the Code.
  3. Landlords must offer tenants proportionate reductions in the form of rent waiver or deferral of up to 100% of the amount ordinarily payable based on the reduction of the tenant’s trade during the respective periods.
  4. Rent waivers must constitute not less than 50% of the total reduction in rental (please note that this does not mean that 50% rental waiver must be offered, as they still need to prove reduction in turnover in this regard).
  5. Rent deferrals must be amortised over the greater of the balance of the lease term, or at least 24 months unless otherwise agreed. It is not clear if the 24 months is from the time of negotiation, the end of the pandemic period, or the end of the recovery period.
  6. Any reduction in statutory charges such as land tax and council rates must be passed on to the tenant in the appropriate proportion (see my comments below regarding Queensland land tax benefits).
  7. A landlord should seek to share proportionally any benefit it receives due to the deferral of loan repayments by a financial institution (it appears somewhat difficult to see what benefit a deferral will occur in this particular case if there is no corresponding waiver of interest). Landlords should, where appropriate, waive recovery of other expenses and outgoings payable by a tenant during the period it is not able to trade.  Landlords can reserve the right to reduce services in such circumstances.
  8. If negotiated arrangements require repayment at a future time, it should be over an extended period. No repayment should commence until the earlier of the end of the pandemic period or the lease expiring, but should also take in to account a recovery period.
  9. No fees, interest or charges should be applied in respect to any rent waived or on any rent deferral.
  10. Landlords must not draw on a tenant’s security for non-payment of rent.
  11. The tenant should be provided with an opportunity to extent its lease for an equivalent period of the rent waiver and/or deferral period. This is intended to provide the tenant additional time to trade.
  12. There should be no rental increases applied. 
  13. There should be no prohibition or imposition of a levy or of any penalties if opening hours are reduced or a tenant ceases to trade.

Summary

As can be seen from above, there are some pretty strict prohibitions on landlords during this period.  If a tenant is requesting rent reduction, then it will be reasonable for you to request that evidence be provided of a reduction in turnover.  What this evidence consists of will be determined by a case by case basis, depending on the nature of the tenancy.  However, please note:

  1. A tenant must establish to the Federal Government that there has been a turnover reduction of at least 30% to be eligible for the Jobkeeper program. Accordingly, a tenant may argue that evidence they are receiving Jobkeeper payments for that respective period may be sufficient.  I do not agree with this.

This is because it may not apply to tenants with multiple locations and/or group structures, as there are multiple ways of providing evidence to the Federal Government.  Further at present, it is merely a declaration which may be revoked if investigation in the future shows that they were not, in fact, entitled.  Also entitlement to Job Keeper does not need to be continually proven. Once eligible it applies from then on until the end of the program.

 I would be recommending that a profit and loss statement certified by the client’s accountant would be an appropriate point to start (and given the transparency requirements, this would not be an unreasonable request).

  1. I would then recommend conducting the assessment on a month by month basis in arrears.
  2. I would also be requesting that the tenant provide evidence as to what steps it is taking to diversify to increase its turnover potential.

It has been raised with me the issue of outgoings and it initially appeared that these would not be covered.  However, it now also appears that these outgoings may also not be able to be recovered if the tenant is not trading.  However, if the tenant is able to trade, then they are recoverable in full. 

This seems somewhat contradictory given that this then creates a differentiation between gross rental (when outgoings are included in the rent) and net rental (where outgoings are not included in the rent).  I believe it is likely that this will be addressed once feedback from the business community is received by the relevant parties.  My view is that it is likely that these will be treated in the same way as rental will be (i.e. that there will be a proportional reduction and/or deferral in the same manner).

Please note that these provisions apply as and from 3 April 2020.

Land tax

The State Government has announced some concessions in relation to land tax, although they are not overwhelmingly helpful.  There are three points in relation to land tax as follows. 

  1. The first step only applies to foreign owners and the 2% land tax surcharge for foreign owners will not apply for 2019/20 assessment year. This will automatically be rebated if applied and no action by an owner is necessary. 
  2. For the 2020/21 assessment year there will be a three month deferral of land tax liabilities. This appears simply to delay the payment date and does not provide any real benefit other than cash flow purposes. Again no action is required for this to occur as it will happen automatically.
  3. Finally, there is a land tax rebate of 25% for eligible properties for the 2019/20 assessment year. Please note that this will apply on a property by property basis.  To qualify, one of the following two circumstances must exist:
    • You are a landowner who leases all of the part of the property to one or more tenants and:
      • the ability of one or more tenants to pay their normal rent is affected by Covid-19; and
      • you will provide rent relief to the affected tenant of an amount at least equal with the land tax rebate; and
      • you will comply with the leasing principles (outlined above) even if the lease is not regulated by them.
    • You are a landowner and/or the following apply:
      • all of your property is available for lease;
      • your ability to secure tenants has been affected by Covid-19;
      • you require relief to meet your financial obligations;
      • you will comply with the leasing principles, even if the relevant lease is not regulated.

Accordingly, this second scenario provides for relief for premises which are currently vacant and are available for lease.

In the above circumstances, there is an ability to get the 25% reduction.  However, you must apply for this rebate.  It will not be provided automatically.  To apply, please go to www.qld.gov.au/environment/land/tax/covid-19.  At the base of the page will be a section indicating how to apply with the relevant links and information necessary for the rebate.

Other considerations

When considering the rental and other waiver and deductions, there will be matters which you need to consider and I strongly recommend that documentation be entered in to with the relevant parties to ensure that things are not overlooked and/or forgotten in the rush to reach an agreement.  These will include:

  1. Potential extension of bank guarantee dates (if the bank guarantee is due to expire at the end of the lease).
  2. Extension of the dates in which the bank guarantee is returned to ensure that any repayment arrangements are adequately covered and secured by that security.
  3. Variation to personal guarantees are not repayment obligations. Personal guarantees are quite often specific to the initial agreement and any variation to that agreement should also have acknowledgement from the guarantors that they agree to the varied proposal.
  4. Maintenance of insurance provisions. Periods of vacancy the insurance can be affected and arrangements to regularly inspect the premises and ensure they are secured will still be necessary.
  5. Possible extension of term – There are suggestions in the leasing principles that extended terms should be offered to tenants to allow them an opportunity to continue to trade beyond the current terms to allow them an ability to make the repayments they have agreed. In some cases, an extended term may be more attractive to a landlord as a potential future investment if the tenant is in a strong position and this could be also considered as a negotiation for any deferred/waived rent.

Summary

As with many things at the moment, there are still significant uncertainty as to how these will impact specific tenancies. 

 


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