What are the current policies in place to assist landlords and tenants? Banking Industry The banks will allow commercial Landlords with loans up to $10 million, (which has been increased from the previous limit of $3 million), to delay their loan repayments for a period of up to six months. Any unpaid interest which has accrued during this six-month period will be added to the loan balance owing by the commercial Landlord. The loan deferral is provided on the following basis:
- The commercial Landlord is prohibited from terminating the lease, re-entering the premises and evicting the Tenant for rental arrears resulting from COVID-19;
- This is applicable to commercial landlords of local shopping centres, restaurants, pubs and clubs; and
- The commercial landlord must agree and strictly comply with the above terms in order to access the loan deferral.
Code of Conduct The Government has announced a Code of Conduct which applies in relation to retail, office and industrial Tenants who are experiencing financial distress or hardship resulting from the COVID-19 pandemic. The Tenant must be eligible for the Government’s JobKeeper program and have an annual turnover of up to $50 million dollars. The principles that are underpinning the Code of Conduct are as follows:
- If the tenancy is subject to the Code of Conduct, the Landlord is prohibited from terminating the lease for non-payment of rent during the COVID-19 pandemic, and within a reasonable recovery period following the COVID-19 pandemic.
- The Tenant must continue to comply with the provisions of its Lease and if the Tenant fails to do so then it will not be entitled to enjoy the benefits of the Code of Conduct.
- The Landlord must provide the Tenant with a rent reduction which is proportionate to the reduction in the Tenant’s trade during the COVID-19 pandemic, and within a reasonable recovery period following the COVID-19 pandemic. The rent reduction can be up to 100%, subject to the circumstances applicable to the Tenant.The rent reduction can be offered by the Landlord by the following mechanisms;
- Rental Waiver: the Landlord agrees that the rent for the specified period is waived and the Landlord is prevented from claiming the waived rent at a later date; and
- Rental Deferral: the Landlord agrees that the rental deferral will be spread to the balance of the lease term which may not be less than 24 calendar months.
- A Rental Waiver must make up 50% of the total rent reduction, for example, if the Tenant is entitled to a rent reduction of $5,000.00 then the Landlord must provide a Rental Waiver of $2,500.00 (being 50% of the total rent reduction of $5,000.00 payable to the Tenant).
- The Rental Waiver can be increased in excess of the 50% of the rent reduction which is required to be given, if the Landlord is able to financially provide an additional Rental Waiver. There must be consideration given as to whether a failure to offer an increased Rental Waiver to the Tenant in excess of the 50% would jeopardise the ability for the Tenant to comply with its obligations under the Lease.
- The Tenant may agree that the Rental Waiver is not applicable to the Lease and the Landlord is not required to provide the Rental Waiver.
- The Rental Deferral cannot be used to cause any future unnecessary financial burden on the Tenant. Any repayment of rent which has been deferred must take place over a lengthy period of time and may not commence until the pandemic and recovery period has ended or the Lease has expired.
- The Landlord is prohibited from applying any fees, charges or interest to any Rental Waivers or Rental Deferrals.
- The Landlord is prohibited from making any claim on any security provided by the Tenant for any non-payment of rent during the COVID-19 pandemic, and within a reasonable recovery period following the COVID-19 pandemic.
- The Landlord should provide the Tenant with an opportunity to extend its Lease for the period in which the Rental Waiver and/or Rental Deferral applies. This will allow the Tenant additional time to trade and to earn income for the payment of future rent.
- The Landlord is prohibited from undertaking any reviews of rent during the COVID-19 pandemic, and within a reasonable recovery period following the COVID-19 pandemic, with the exception of retail leases which are based on turnover rent.
- The Landlord may not take any action against the Tenant for breach of covenant for failure to trade or failure to keep open during agreed trading hours during the COVID-19 pandemic, and within a reasonable recovery period following the COVID-19 pandemic.
- If the Landlord and the Tenant cannot amicably come to a commercial arrangement in accordance with the Code of Conduct, then the matter may be referred for mediation/dispute resolution.
- The Code of Conduct will be implemented in legislation on a state and territory basis.
What is the Government’s purpose in implementing these policies? The Government is encouraging both Landlords and Tenants to come together to negotiate variations of commercial terms and/or rental abatements on a good faith basis by sharing the financial burden. Any commercial arrangement reached between the Landlord and the Tenant should be in consideration of the specific financial position of the Tenant and should be proportionate to the reduced income and profitability of the Tenant. Further consideration should also be given to the legal structure of the Tenant, the current status of the Tenant, and the length of the remaining tenancy term. The purpose of these policies is that the Tenants will have a viable business which can operate following the resolution of the COVID-19 pandemic and the Tenant will not be burdened with onerous rental arrears. Further, the Landlord can maintain the Tenant in the premises by preserving the Lease, continue paying its loans, retain its employees and continue with its investment strategy. If you wish to discuss any of the above further please feel free to contact Dean Woodbridge on (02) 9279 4888 or firstname.lastname@example.org.