COVID-19 Commercial Rental Assistance: A Landlord’s Guide

COVID-19 Updates

Updated June 1st 2020

Bradley Ross

Even the most ardent skeptics would have to admit that the Coronavirus is more than just another cold.  The impact on businesses and the wider community is unprecedented and we are seeing a range of outcomes for our clients, but what is common amongst it all is the uncertainty of the situation. 

This uncertainty is requiring businesses to assess all their spending habits, and where possible, seek reductions in high cost compulsory expenses.  One of the major expenses for businesses apart from inventory and wage costs is rent, and we are seeing an increasing number of enquiries coming from landlords about requests from tenants for rental assistance.

On 7 April 2020, the National Cabinet issued the Code of Conduct for Commercial Tenancies (the Code), outlining a set of good faith leasing principles to be followed by both tenants and landlords.  The objective of the Code is for tenants and landlords to share, in a proportionate and measured manner, the financial risks and cash flow impacts during the COVID-19 pandemic period, whilst seeking to appropriately balance the interests of both parties.  

The Code only applies to small-medium sized business tenants (those with annual turnover of up to $50 million), and are eligible to participate in the JobKeeper programme.  All States and Territories have now passed laws to mandate compliance with the Code. 

Whilst the Code is only applicable to small-medium sized business tenants who are suffering financial stress or hardship, as a result of the COVID-19 pandemic, it is expected that landlords will work with all of their tenants to develop tailored, bespoke and appropriate temporary rental assistance packages on a case by case basis. 

Whether the Code applies to your tenants or not, there a number of things that need to be considered before granting any rental concessions:

  • any request from a tenant should be in writing, even if it is a related party.  The request from the tenant should provide details of what is being sought and the reasons why they believe that rental relief is warranted.
  • does the lease allow for the terms to be modified mid-way through its term.  In some rare cases the lease may not provide for any variation of the lease terms or provide for any concessions and may require the lease to be terminated and a new lease entered into;
  • has the tenant actually been significantly impacted by the Coronavirus.  Landlords should seek some form of confirmation from the tenant that their business has actually suffered a downturn as a result of the Coronavirus.  This could be in the form of confirmation that they are eligible for, and have registered for JobKeeper payments, profit and loss comparisons, revenue comparisons, revenue forecasts, cash flow forecasts or forced shut-down notices.  Any information provided should be considered in light of the tenants’ business and of course, should be kept confidential;
  • what is the relationship like with the tenant – have they always paid their rent on time, do they keep the property clean and tidy, have they generally been complying with the terms and conditions of the lease, how long have they been a tenant, etc.;
  • what is the impact of providing the requested support – will it impact your ability to service loans and meet other financial obligations.  Where providing rental support may impact your ability to service your loans, you should contact your financier to see what support they may be able to provide you during the period of reduced or no rent.  When assessing the support from the bank, it is essential to take into consideration the long term impacts of any deferral of loan repayments;
  • what is the impact of not providing the request – will you lose the tenant, what will be the lost revenue in the short and medium term whilst a new tenant is found, what concessions you would have to give to your new tenant, how long is remaining on the lease, etc.  In some cases providing rental relief to an existing tenant will be cheaper than trying to find a new tenant;
  • does the request for rental assistance include a request to adjust outgoings if the tenant is liable for them.  Care needs to be taken avoid the situation where there is no rental income to cover the outgoings.  When assessing the request, consideration should also be given to whether there are any stimulus measures that would flow through to the tenant (e.g. land tax deferrals);
  • are there alternatives to what the tenant is proposing that may provide them with some rental relief but also allow cash to continue to keep coming in. 
  • for self-managed superannuation fund landlords, will providing the rental assistance impede the fund from being able to meet your financial commitments, including making minimum pension payments (to retain the tax free status on pension income).  This will be important especially where the member’s pension account has grown in excess of the $1.6m Transfer Balance Cap.
  • for self-managed superannuation fund landlords, is the property leased to a related party.  If so, then any rental assistance provided to the tenant must not cause the fund to breach superannuation laws, such as providing financial assistance to members, not dealing with related parties on an arm’s length basis.

In formulating and enacting temporary rental assistance packages, the landlord and tenant must follow the leasing principles outlined in the Code. 

These include:

  1. not terminating the lease due to non-payment of rent during the COVID-19 pandemic period;
  2. the tenant must remain committed to the terms of their lease, subject to any temporary amendments made during the COVID-19 pandemic period.  A material failure by the tenant to abide by substantive terms of the lease agreement will forfeit any protection provided to them under the Code;
  3. Unless waived by the tenant, no less than 50% of the total reduction in rent payable under principle 3 should be provided in the form of rent waivers.  Subject to the landlords’ financial position, rent waivers should constitute a greater proportion of the total reduction in rent, where failure to do so would compromise the tenant’s capacity to fulfill their ongoing obligations under the lease;
  4. Unless otherwise agreed, the recovery of rent deferrals must be amortised over the greater of the balance of the lease term or 24 months;
  5. Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed onto the tenant in the appropriate proportion applicable under the terms of the lease;
  6. A landlord should seek to share any benefit it receives due to the deferral of loan payments provided by a financial institution;
  7. Landlords should where appropriate, seek to waive recovery of any other expense payable by the tenant under the terms of the lease during any period that the tenant is unable to trade.  Where this occurs, landlords are entitled to reduce services;
  8. If the temporary rental assistance package arranged in accordance with the Code necessitate repayment, this should occur over an extended period so as to avoid placing undue financial pressures on the tenant.  No repayments should commence until the earlier of the COVID-19 pandemic ending or the existing lease expiring;
  9. No fees, interest or other charges should be applied with respect to rent waived in principles 3 or 4 and no fees, charges or punitive interest may be charged on deferrals provided in principles 3, 4 or 5;
  10. Landlords must not draw on a tenant’s security for the non-payment of rent during the COVID-19 pandemic period and/or a reasonable subsequent recovery period;
  11. The tenant should be provided with an opportunity to extend its lease for an equivalent period of the temporary rental assistance;
  12. Landlords agree to a freeze on rent increases (except for retail leases where rents are determined based upon turnover) for the duration of the COVID-19 pandemic period and a reasonable subsequent recovery period;
  13. Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

Whilst the Code does not apply to business tenants whose turnover is greater than $50 million, or who are not eligible for the JobKeeper programme, it’s fundamentals should still be applied to negotiations with those tenants – namely to work with the tenant to develop a tailored, bespoke and appropriate temporary rental assistance package.

Once you have determined whether to agree to their proposal, decline it, or put forward an alternative solution, you should communicate this to the tenant in writing. 

When you and the tenant have agreed on the temporary rental assistance to be provided, this should be documented in writing, or where applicable documented in a lease variation agreement, which should be signed by both parties.  The legal fees associated with drawing up this agreement should be negotiated with the tenant before any costs are incurred (again preferably in writing).

We are aware of a number of commercial agents suggesting that rent should be set for six months based upon the decline in revenue for March 2020 when compared to March 2019, with a reconciliation being performed at the end of the six months based upon the actual decline in monthly revenues. 

This approach may be fraught with danger as the tenant may claim that this catch up is a deferred rental payment which they are entitled to repay over 24 months or the remaining term of the lease, whichever is the greater.  As such, we recommended that your temporary rental assistance package require the tenant to provide regular information as to how their business is performing so that any rental adjustments are made immediately. 

Obtaining regular information on the performance of the tenant’s business will also assist in identifying whether the support package agreed upon continues to be appropriate given the changes in the tenant’s business.

It is essential for self-managed superannuation fund landlords who lease property to related parties that the rental relief you provide is no more favourable to the tenant than they would have received had they leased the premises from an unrelated party. 

Documenting the process undertaken, what information was relied upon in arriving at the decision, what support other landlords have provided to tenants in a similar situation, what professional advice you sought or relied upon will be of paramount importance in demonstrating that you have provided the support on an arm’s length basis and that you have tried in all material respects to comply with the superannuation laws.

We have developed tools, including a checklist of information to request from a tenant, which are designed to assist landlords and tenants formulate and document a temporary rental assistance package. 

If you would like a copy of these tools, have any questions or concerns over a request you have received from your tenant, or want to discuss any arrangements already made, please contact your CIB adviser.