COVID-19: Commercial Leasing Principals – Mandatory Code of Conduct

On April 7^th, the Government issued a Mandatory Code of Conduct for Commercial Properties. They are still to issue a code in respect of residential premises.

The Code is, in my opinion – very disappointing – it provides a prescriptive approach that will help tenants (which is necessary and important), but provides no support to the owners – it is almost like the Government believes that if you own property for lease, you are wealthy and don’t need support (the document is also 7 pages in length!)

Incentives have been provided to business tenants, in the form of cash back, JobKeeper, Payroll Tax remission and (for those with available reserves) depreciation incentives. The only incentive afforded to the property owner is a loan repayment deferral.

I believe there has been no thought that an owner may actually need rental income to live on.

The Code applies where the tenant qualifies for JobKeeper – meaning they have suffered a reduction in turnover of more than 30% (we are awaiting legislation on how this will be measured).

Whether the Code applies or not, I recommend both parties of the lease recognise that in the present circumstances, neither party is at fault – as such you should discuss the issues together to try and find a workable solution for both parties. The aim should be to retain the tenancy for the longer term.

Some key issues to note:

Lessor/Owner

• Continues to be liable for property outgoings
• May have loan commitments to meet (it’s likely a 6 month deferral can be arranged with lender)
• May need the rental income to live on
• Has received no Government support

Lessee/Tenant

• Business may be impacted due to COVID-19, in the extreme the business may have been forced to close

Issues both parties should consider:

• Lease between parties – I suggest you seek legal advice in drafting up any agreement.
• The tenant (employers only) may receive a tax free cash subsidy of up to $100,000 over the March to September BAS (the benefit of these monies is expected late April onwards)
• The tenant (employers only) may receive JobKeeper payments of $1,500 per fortnight per eligible employee (first monies will not be received until early May)

So what does the Code prescribe?

• Unfortunately, it’s not that straight forward – there is no correct answer as each case will be different – the code is very clear on that.
• As stated above, the code applies when the tenant qualifies for Job Keeper.
• The tenant is required to provide profitability reports to establish a basis for suffering downturn – this is a good step for both parties to be able to work together.
• The broad principal proposed (in the absence of any agreed terms) is:
  • Owner must offer proportionate reduction in rent, based upon tenants reduction in turnover
  • Such rental reduction should be in the form of:
    • 50% as a waiver of rent; and
    • 50% as a deferral

• • The owner should also consider waiving of outgoings payable during the period the tenant is not able to trade

• Payment of Rental Deferrals should be amortised over the balance of the lease term or 24 months, whichever is the greater

If any of these issues affect your specific circumstances and you would like to discuss these matters further, please contact our office on enquiries@hqb.com.au.

– Ian Hogbin

Posted 08.04.2020

This article is compiled as a helpful guide for your private information and is subject to copyright. We suggest that you do not act solely on the basis of material contained in this article because items are of general nature only and may be liable to misinterpretation in particular circumstances. We recommend that our advice be sought before acting on any of these crucial areas.