The impact coronavirus’ has had on Australian small to medium businesses has been severe. Social distancing and reducing non-essential travel has resulted in little to no patronage and reduced revenue for many businesses. Businesses are experiencing reduced cash flow and is impacting their ability to remain viable and pay fixed costs; such as rent.
Commercial Leasing Code of Conduct
The objective of the Code is to reduce the financial burden on the tenant ensuring rental costs does not compromise the small to medium business’ ability to weather and recover from the crisis.
The Code applies to tenants that:
- Have an annual turnover under $50million, and
- Are eligible for the JobKeeper Payment (decline in turnover >30%)
Conditions on Landlords
The Code imposes the following conditions on Landlords:
- They must not terminate leases or draw on security deposits for non-payment of rent during the pandemic period or a reasonable subsequent recovery period.
- Landlords must offer their tenants a reduction in rent payable, up to 100%, based on the reduction in the tenant’s trade.
- The rental reduction must include a minimum of 50% rental wavier (rent free) & the remainder rent deferral. Tenants may wavier the requirement for a 50% minimum rental waiver (rent free) by agreement.
- The rental deferral must be repaid over the balance of the lease or over 24 months, whichever is greater, unless otherwise agreed by both parties. The tenant should be provided with the opportunity to extend their lease for a period equivalent to the rent reduced period. Landlords should be careful with leases that expire shortly after the end of the crisis as any deferred rental payments may be at risk.
- Landlords agree to freeze any rental increased for the duration of the pandemic and the subsequent recovery period. With the exception of retail leases based on turnover and any agreement between the parties.
- Landlords cannot apply any interest, fees or charges to the rent reduction nor any penalties for reduced operating hours.
- Landlords must pass on any reduction in charges or deferral of loan payments with the tenant in a proportional manner and where appropriate waive recovery of other outgoings.
Conditions on Tenants
The Code imposes the following condition on tenants:
- They must stay committed to the terms of the lease, subject to any negotiated amendments.
Mediation for Commercial Leasing Dispute
A failure to reach an agreement between the parties will be referred to the applicable states commercial leasing dispute resolution process for binding mediation.
Land Tax Reduction
The New South Wales and Queensland State Governments have announced they will both be providing a discount up to 25% on land tax for calendar year 2020 and a three month deferral on land tax– provided Landlords meet the terms of the Code.
Support from Banks
Australian financial institutions are expected, but not bound, to support Landlords.
Example:
Tenant has turnover under $50m and is eligible for JobKeeper. The Tenant due to Coronavirus has experienced a 60% reduction in turnover.
- Minimum 60% reduction in rent
- Minimum 30% Rental Waiver (Rent Free)
- Remainder Rent Deferral – recouped over at least 24 months (or otherwise agreed)
In Conclusion:
It is of some concern that potentially more burden is being places on the recovery of small to medium businesses on the backs of Landlords.
Tenants should access all stimulus measures such as Employer Cash flow boost & JobKeeper Payment to remain viable.
However with open communication and a willingness to work together and potentially binding financial institutions to provide assistance, will see both tenants and landlords refresh, reload and relaunch from the current crisis.
How can Walsh Accountants Help?
If you’re a commercial landlord or tenant and you would like to discuss this issue, please do not hesitate to contact our office to speak with your Accountant, or a specialists from our Property and Construction Team
