The Prime Minister has stated evictions will be put on hold over the next 6 months for commercial and residential tenancies in financial distress, who are unable to meet their commitments due to the impact of COVID-19.
SME Commercial Leasing Principles during COVID-19
The measures which were announced on 7 April 20120, in relation to commercial tenancies will need to be legislated at a State level, however, each State will adopt the common leasing principles. Below is a summary of principles:
- 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 the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code.
- 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.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3. 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 the greater, unless otherwise agreed by the parties.
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- A landlord should seek to share any benefit it receives due to deferral of loan payments with the tenant in a proportionate manner.
- Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
- If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant.
- No fees, interest or other charges should be applied.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee).
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.
- 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.
Commercial tenants, landlords and financial institutions are encouraged to talk about short term agreements, and if they can’t, either party is able to refer the matter for binding mediation by the relevant State authority.
What changes have occurred in NSW?
Significant changes to leasing practice in New South Wales have been made by the commencement of the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) (the Act) on 25 March 2020.
The Act allows the Minister to recommend regulations amending legislation governing retail leases (for example, leases of supermarkets, pharmacies, news stands) as well as residential tenancies (specifically, tenancies in respect of residential premises).
It is likely that the regulations will, amongst other things, temporarily:
- prohibit landlords from evicting tenants due to non-payment of rent (including outgoings, GST and other contributions)
- restrict landlords from calling on bond money, such as cash security bonds and bank guarantees
- prohibit landlords from charging penalty interest on late payments of rent.
NSW has not yet implemented the announced Evictions Moratorium and Rent Relief.
Right now, landlords can proceed with the same legal processes as usual. However, they must still follow the processes laid out in the Residential Tenancies Act 2010. You cannot evict a tenant without an order from the NSW Civil and Administrative Tribunal (NCAT), and only the Sheriff can physically remove a tenant.
Financial Assistance for Renters?
At the time of writing, the only specific support available for renters appears to be via Centrelink. If renters are eligible for Centrelink benefits, they may be able to access the additional rent assistance payment.
For more information about your rights as a tenant or for advice in dealing with your landlord, see the Tenants Union of New South Wales https://www.tenants.org.au/blog/renting-and-covid-19-information.
The NSW Government has announced assistance for businesses shut down as a result of COVID-19. The grants of up to $10,000 will be available to businesses who meet the following criteria:
- Have between 1-19 employees and a turnover of more than $75,000;
- A payroll below the NSW Government 2019-20 payroll tax threshold of $900,000;
- Have an Australian Business Number as at 1 March 2020, be based in NSW and employ staff as at 1 March 2020;
- Be highly impacted by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order 2020 issued on 30 March 2020;
- Use the funding for unavoidable business costs such as utilities, overheads, legal costs and financial advice;
- Provide appropriate documentation upon application.
Application for this grant will be available through Service NSW within a fortnight and remain open until 1 June 2020.
If you are a small business and need the assistance of an expert in dealing with your landlord or tenant, Small Business NSW may be able to assist. Call 1300 795 534 or visit https://www.smallbusiness.nsw.gov.au/contact.
Financial Support for Landlords
If landlords have rental insurance the fact that a tenant has stopped paying rent due to loss of job for example may be sufficient for the landlord to make a claim under their insurance policy. Most insurance policies require an eviction notice to be issued to be eligible to claim on the loss of rent provisions, however, some insurers are waiving this requirement due to the current circumstances.
Landlords should contact their insurer as soon as possible to find out if they are covered.
The major banks have introduced measures to assist eligible home loan and business loan customers to pause repayments for up to six months amid COVID-19.
Businesses with total business loan facilities of up to $10 million will be able to defer repayments for loans attached to their business for six months.
The general conditions for businesses are as follows:
- For commercial property landlords, they provide an undertaking to the bank that for the period of the interest capitalisation, they will not terminate leases or evict current tenants for rent arrears as a result of COVID19
- the customer has advised that its business is affected by COVID-19
- the customer was current in terms of existing facilities 90 days prior to applying
- interest is capitalised – meaning either the term of the loan is extended, or payments are increased after the deferral period.
The government is encouraging anyone concerned about their mortgage to contact their bank.
Unfortunately, whilst other States have put in place significant deferrals for land tax payments, NSW has yet to enact any changes for Land Tax.
Upon phoning the Office of State Revenue to find out what measures they have in place we were directed to their website which simply states if you require more time to pay your Land Tax assessment, you can set up a payment plan by instalments or an extended deadline. This can be done by contacting OSR directly on 1300 139 816, or through their website https://www.apps07.osr.nsw.gov.au/mars-online/pages/debtManagement/client_debt_view.jsf.
Central Coast Council has currently not announced any reductions or across the board reductions for rates payments.
Council states on their website that they have put on hold all legal action, including letters, calls and recovery activities on hold until the 31 May 2020. For customers who can prove genuine financial difficulty, interest on outstanding payments will also be placed on hold until 31 May 2020.
Council customers, including businesses and community groups, who are currently experiencing financial hardship can contact Council to discuss an acceptable payment arrangement for Council bills.
Businesses that have been closed as a result of COVID 19 (i.e. restaurants, hairdressers, etc.) may have some Council fees waived. For a full list of the waived fees and services – see https://www.centralcoast.nsw.gov.au/council/council-news/covid-19-information/community-and-business-support
Rent Negotiation Considerations:
Proving severe rental stress – The SME Commercial Leasing Principles note that any SME tenants which are eligible for the Federal Government’s JobKeeper payment are automatically considered to be in financial distress.
The overarching principles state that the landlord and the tenant will provide sufficient and accurate information within the context of their negotiations. Sufficient and accurate information is defined as information generated from an accounting system and information provided to or received from a financial institution.
It would therefore appear reasonable that information can be requested by a tenant showing the decrease in turnover by comparing a trading period post COVID-19 with the same trading period in the 2019 financial year.
It should be noted that requesting other information, such as the client’s balance sheet, or savings account balances, may not be deemed reasonable. Remembering that if the SME is eligible for the JobKeeper payment (which has no bearing on the client’s assets position) they automatically meet the criteria of financial hardship and are entitled to relief under this code.
The position of each State is expected to become clearer as emergency legislation / regulations are introduced.
Rent deferral v rent waiver –
A Landlord may agree to defer rent for the tenant, but this can result in a large debt due to be paid by the tenant at the end of the deferral period. A debt burdened tenant may not be able to recover post the current crisis (leaving the landlord with no tenant).
Another option is to grant a rent waiver, being a partial or total reduction in rent. This amount will never be repayable by the tenant.
Under the SMB Commercial Leasing Principles, Landlords are required to provide a minimum 50% of the rent reduction as a rent waiver. The remaining 50% can be in the form of rent deferrals, which will be recovered by the landlord over the remainder of the lease or 24 months whichever is greater.
The economic uncertainty caused by COVID-19 is likely to make sitting tenants with a proven track record a more attractive option than a startup.
Landlords should focus on retaining their current tenants and negotiating with them early to prevent a tenant abandoning its premises.
Can a tenant use the Leasing Principles to terminate their lease?
Principle #2 of the SMB Commercial Leasing Principles requires that tenants remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code. If the tenant materially fails to by abide by the terms of the lease, they will forfeit any protections under the Code.
It would therefore appear based on this principle, that a tenant could not use the code to terminate a lease without financial penalty.
As the code is silent on lease terminations, the existing provisions of the lease would appear to apply if a tenant needed to terminate a lease.
However, the overarching principles of the code do state that “as the objective of this Code is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership, and the application of the code modified accordingly”. Therefore, it may be necessary for landlords to provide leniency to tenants who are in severe financial hardship and are attempting to terminate their lease as a result.
Special Considerations for Self-Managed Superannuation Funds looking to reduce rents for Related Party Tenants
Whilst a self-managed superannuation is usually prohibited from charging less than market value rent to a related party tenant, the ATO’s compliance approach for the 2019–20 and 2020–21 financial years is that they will not take action where an SMSF gives a tenant – who is also a related party – a temporary rent reduction or waiver during this period.
Where there are temporary changes to the terms of the lease agreement in response to COVID-19 it is important that the parties to the agreement document the changes and the reasons for the change. Documentation should include:
- Request from the tenant;
- Minutes of a meeting of the trustees; and
- Letters or emails outlining the agreed terms.
In Conclusion …
Both landlords and tenants should take the time to review the Code, review existing lease agreements and talk to their accountants before acting. There are so many factors to take into consideration to ensure all parties emerge from this situation in a good position. If you need to talk, please call Kennedy Barnden on 02- 4365 6789. Our office remains open to assist our clients throughout this period.