Negotiating a fair commercial rent outcome is proving to be one of the most challenging parts of the Coronavirus impact for many businesses. Adding to the complexity is the unique nature of individual leases requiring a case by case solution.
In anticipation of this, the National Cabinet prepared a mandatory Code of Conduct for Commercial Leasing designed to appropriately balance the interests of tenants and landlords. While we are still waiting for all states to legislate the Code, and provide further specifics, we can examine its broad application.
The Code outlines a set of leasing principles designed to provide a framework for ‘good faith’ negotiation between landlord and tenant setting out minimum relief requirements for businesses that meet the eligibility requirements. You can read more about the code and principles here: Leasing Code of Conduct
Who does the Code apply to?
- Commercial tenants with turnover up to $50 million, and
- Are eligible for the JobKeeper payment [requiring a 30% decline in revenue]
What do the principles say?
Here’s a snapshot of some key points:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period)
- Tenants must remain committed to their lease – Covid-19 is not a way to early terminate
- Landlords must offer proportionate rent reductions in line with tenant’s reduction in trade during the COVID-19 pandemic period and subsequent reasonable recovery period
- Landlords must not draw on a tenant’s security for the non-payment of rent during the Covid-19 period
- Where agreement cannot be reached the matter should be referred to binding mediation
How do I calculate a rent reduction using the principles?
It’s essential to consider all the principles during the negotiation however it is principles three, four, and five that outline the basic calculation parameters. I’ve included these three at the bottom of this blog.
Before we look at an example it’s important to know that relief can be provided in two parts:
- Rent Waiver [effectively a discount or rent forgiveness]; and
- Rent Deferral – which means the deferral amounts are repayable over the remaining term of the lease or at least 24 months
Here’s an example of how the principles might be applied:
Business Turnover has fallen 60%
Current rent is $6,000 per month
- Landlord must offer to provide 60% cash flow relief consistent with drop in revenue (i.e. $6,000 x 60% = $3,600 relief per month).
- At least half of the relief is to be provided as rent free / rent waiver (i.e. $3,600 x 50% = $1,800).
- The remainder of the relief is rent deferral, to be spread over remaining term of lease, or at least 24 months. [i.e. $3,600 – $1,800 = $1,800 per month]
- The new rent is $2,400 per month (i.e. $6,000 x 40%, the level turnover has fallen to). This is still due and payable. In other words, this is the rent to be paid during the COVID-19 pandemic lockdown & recovery period.
So, using the above, if the lockdown & recovery period went for 6 months then the outcome would look like this:
– New monthly rent $2,400 x 6 = $14,400
– Deferred rent of $1,800 x 6 = $10,800 [paid off over minimum 24 months]
– Rent waived = $1,800 x 6 = $10,800 [not repaid]
It is important to note that this example represents only the basic provisions of the code without considering other potential factors.
At the end of the day, this is a commercial negotiation between two parties and any outcome must consider the impact on the tenant and the landlord’s capacity to provide relief, it is a shared obligation with the impact to be felt by both sides.
It is fair to say that a stable, rent paying tenant in a years’ time will be more valuable than one struggling to pay rent today and these unique circumstances mean nothing is really ‘off the table’. The end agreement may even incorporate other matters relating to the tenancy like extensions to the term of the lease or additional option periods.
Before undertaking any negotiation of this type, it is essential to familiarise yourself with the full details of the Code of Conduct and how they may apply to your individual situation. Should you require assistance in navigating your way through this matter please don’t hesitate to contact us.
The information supplied here is general in nature and does not constitute financial or legal advice. Before making any decisions, we recommend that you obtain professional advice that considers your individual circumstances and needs.
Principles 3,4 & 5 as applied above
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfill their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater unless otherwise agreed by the parties.