While many businesses are shut down entirely as a result of the response to Coronavirus (COVID-19), others are doing their best to make ends meet.
Although the JobKeeper scheme recently introduced by the Australian government will assist with the largest expense that many businesses pay from month-to-month, the next most pressing concern for many Australian businesses has been whether they can continue to meet their rent obligations under their leases.
This article sets out the options you have available to you if you are struggling to meet your rent payments, in particular:
- the details of the mandatory code of conduct introduced by the government on 7 April 2020 which must be followed by both landlords and tenants of commercial leases.
- some practical measures to help you negotiate with your landlord;
- what to do if your landlord refuses to engage in negotiations with you.
What is the Mandatory Code of Conduct?
As the name suggests, the code of conduct introduced by the Australian government is designed to impose on both landlords and tenants a set of principles that will apply to assist negotiations of amendments to existing leases.
The code itself has been confirmed in New South Wales by specific state legislation.
The main principles of the code of conduct are set out in the document itself, but fundamentally are:
- it is in everyone’s best interests to work together to ensure business continuity;
- parties to commercial leases should be discussing relevant issues and working towards mutually satisfactory outcomes in good faith;
- solutions agreed should be proportionate and appropriate having regard to the actual impact that COVID-19 is having on the relevant business;
- the solutions formulated in line with the code are designed to be temporary and not an opportunity to negotiate permanent measures to the benefit of one party.
Who Can Seek Rent Relief Under the Code?
While the code itself expresses a more general desire that all parties, irrespective of whether bound by the code or not, work together during the present circumstances, the code does not apply for the benefit of all tenants of commercial leases.
Specifically, for the code to impose its principles on your situation, you will need to be an eligible business for the purpose of the government’s existing JobKeeper program.
In addition, the code’s operation is limited to businesses with an annual turnover of up to $50 million.
So, for example, you might have a business with a slim profit margin and a turnover of $51 million being significantly more impacted than business with high profit margin and a turnover of $49 million. The former will not be eligible for the rights provided by the code but the latter will be.
More relevantly, your business needs to have actually been affected by the COVID-19 pandemic, so an unrelated downturn would not assist you to be eligible.
For more information, we suggest that you investigate the requirements for eligibility of the JobKeeper program which you can find here.
What Relief Can you Seek for your Lease?
If the code applies to your tenancy then there are various forms of relief you can seek for your lease from your landlord.
However, the code is quite clear that its intention is not to offer a fixed or industry-wide solution for every landlord and tenant to adopt. In fact, due to the enormous range of tenancy situations to which the code might apply, the code specifically encourages parties to reach solutions that have regard to their particular circumstances.
There are two types of relief that a tenant can seek from its landlord:
- rent waiver (that is, free rent);
- rent deferral (that is, where rent remains payable at some point but not immediately).
Importantly, a landlord is obliged to provide a tenant with rent relief if the mandatory code applies.
However, that relief needs to be proportional to the financial impact that the business has suffered as a result of COVID-19.
For example, if your business has suffered a 25% downturn in revenue as a consequence of the pandemic, and you would not be entitled to seek a 100% rent waiver from your landlord. Your landlord is only obliged to offer you 25% relief.
Once you have determined how much relief you might be entitled to, the question then becomes which type of relief must be offered. Under the code, at least 50% of the relief to which you have become entitled must be in the form of a rent waiver.
Of course, you could try to negotiate with your landlord for a 100% rent waiver depending on your circumstances and negotiation strategy.
For the balance, the landlord is only obliged to offer a rent deferral. The deferral must amortise (that is, spread out) the deferred rent for 24 months, or the remainder of the lease term, whichever is longer.
Of course parties are able to negotiate more favourable terms having regard to the circumstances, but these are the minimums that your landlord is obliged to offer you if the code applies to your tenancy.
A Practical Example
Joe has run a successful café in a supermarket for 5 years. Joe’s turnover during that time has been steady at $15m per annum.
Joe pays $4,000 p/m rent to his landlord, Mary, under a lease that has 3 years still to run. As a result of the requirement that Joe no longer serve his customers in his café, Joe’s turnover has dropped by 50% compared to the same time last year.
Because of his situation, Joe is eligible for the JobKeeper package. Mary is also obliged, under the mandatory code, to offer Joe rent relief of $2,000 per month. At least $1,000 of that needs to be a waiver, so immediately Joe’s rent will be reduced to at least $3,000 p/m for the time being.
The remaining $1,000 per month will need to be paid by Joe within the next three years, being the remainder of his lease term.
What Else Can’t a Landlord Do?
As well as the positive obligation to offer rent relief, landlords are also prohibited from taking certain steps in relation to relevant tenancies. A landlord cannot:
- terminate a lease due to non-payment of rent, or charge interest on late rent (including rent that has been deferred);
- increase rent;
- impose penalties as a result of changed trading hours;
- cash your bank guarantees or securities;
- hold on to reductions in land tax or rates.
How to Approach Negotiations with Your Landlord
In order to ensure a successful negotiation, some practical steps can help you to get things done better and faster.
Here are our general suggestions:
- Check your eligibility – first and foremost, ensure that your tenancy meets the criteria for the mandatory code of conduct to apply;
- Gather documents – to ease the way, it’s helpful to have supporting documents to demonstrate the downturn your business has experienced, its JobKeeper eligibility, and the way in which you intend to attribute your decreased revenue to the pandemic. Not only is this required by the code, it’s also sensible backup to have;
- Be clear about what outcomes you want from the negotiation, which may or may not be the bare minimum entitlements under the code.
Once you have these things, we highly recommend (as you might expect) that any proposal be made in writing, clearly setting out your eligibility, attaching the relevant documents and making a clear suggestion about the path ahead.
Of course, if you don’t want to simply send a formal piece of correspondence out of the blue, you can always call your landlord representative or agent in advance to give them a polite heads up that the letter will be coming their way.
As part of the negotiations, it’s important to recognise that your landlord is likely experiencing financial impact as well. The landlord may or may not have obligations to its financier that will be impacted upon by any rent relief that it offers you. That does not necessarily change the minimum rent relief that a landlord is obliged to offer, but at the very least when it comes to communicating some empathy concerning the landlord’s position might be useful to smooth the way towards an acceptable outcome.
What If My Landlord Isn’t Prepared to Negotiate?
It’s possible you’ve already attempted to negotiate a rent reduction from your landlord and have been turned away.
So what can you do if your landlord refuses to negotiate even though the mandatory code of conduct requires them to?
The code of conduct requires both the tenant and the landlord to be transparent. That includes providing sufficient and accurate information to each other to allow open discussions to be had. So, for example, if the landlord claims that its cash flow has reduced the same as yours, and that is why it cannot offer a higher rent waiver than the minimum, then you should request that they provide support for that assertion.
If the landlord declines, then you can always politely point them to the requirements of the code that applies to the situation.
Wrapping Up the Deal
Once you have concluded your negotiations, it’s absolutely necessary to document what has been agreed.
Generally speaking we recommend that any amendments be incorporated by a proper amendment to your lease. They can, of course, be removed at the appropriate time if necessary after the code requirements cease to be relevant.
Need Help Getting your Rent Relief In Place?
In periods where everyone is watching their finances very closely, negotiating your rent relief package with your landlord might benefit from professional assistance.
We can help you:
- Verify your eligibility for the rent relief;
- Put together your supporting documents;
- Commence the negotiations with your landlord;
- Deal with difficult responses; and
- Document and finalise the deal.
If you need help getting things moving so that you can protect your cash flow, reach out to us.