Are you having trouble paying or receiving your commercial rent due to COVID-19?

Small business accountant overseeing a real estate transaction with a miniature house and tied dollar bills exchanged over a contract on a table.
The COVID-19 pandemic has caused a substantial decline in turnover for businesses, including those in Sydney. Many businesses have been compelled to close their doors temporarily, exacerbating the issue of tenants struggling to fulfil their commercial rent obligations. This financial predicament has created a ripple effect, impacting landlords who depend on rental income to meet their own mortgage commitments. Accountants in Sydney can provide valuable assistance in navigating these challenging circumstances.
To try to manage this situation, Prime Minister Scott Morrison has released a mandatory Code of Conduct to impose good faith leasing principles between landlords and tenants of commercial tenancies. The Code is to be effective from 3 April 2020, once it is enacted through legislation and is applicable where the tenant is eligible for the Government’s JobKeeper programme and has an annual turnover of less than $50 million (SME). While the Code is effective from 3 April 2020, landlords and tenants alike must assume that the legislation will pass as is. The Code attempts to share the pain of the crisis between the landlord and tenant. Below is the link to the Code. Whether you are a tenant or landlord, things must be considered when negotiating rent relief in the above circumstances. The Code sets out principles which should be applied on a case-by-case basis when negotiating these temporary arrangements. These include;
  • Leases must not be terminated due to non-payment of rent during COVID-19.
  • SME tenants must continue to abide by the substantive terms of their lease (subject to amendments under the Code). Otherwise, they risk forfeiting any protections provided to them under the Code.
  • Landlords must offer SME tenants reductions in their rent through waivers or deferrals of up to 100% in line with the decrease the tenant has experienced in their trading for COVID-19 and a reasonable recovery period afterwards.
  • Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 period, with a more significant proportion in cases where failure to do so may compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regarding whether landlords have the financial ability to allow such additional waivers must also be had. Tenants, by agreement, may waive the 50% minimum rent waiver requirement.
  • If a rent deferral is agreed to, the deferral must be amortised over the balance of the lease term or for a term of no less than 24 months, whichever is greater (unless otherwise agreed by both parties)
  • Landlords should seek to share any benefit, in a proportionate manner, that they receive from any deferred loan repayments.
  • They should also look to pass on savings to the tenants on land tax or council rate decreases received.
  • Landlords should not draw on tenants’ security during COVID-19 and a reasonable recovery period afterwards.
  • The tenant should be allowed to extend the lease terms in the recovery period after COVID-19, even if receiving a rent waiver or deferral.
  • Landlords are to agree to a freeze on rent increases during the COVID-19 period and recovery period, notwithstanding any previous arrangements between the landlord and tenant.
  • Landlords are not to impose penalties if the tenant reduces opening hours or ceases trading during COVID-19.
  • No fees, charges or interest are to be charged by the landlord on rent waived or deferred.
  • There will be a need to provide sufficient and accurate financial information and evidence of eligibility for the JobKeeper programme to help confirm your entitlement as a tenant for such waivers and deferrals.
The Code makes it clear that each lease will be dealt with on a case-by-case basis based on the financial situations of the relevant parties.  It is intended that the Code is to be implemented by the States and Territories through legislation or regulations. Whether you are a landlord or a tenant, if you want clarification of any of the issues described above, don’t hesitate to contact us to discuss. Kreston Stanley Williamson Team *Correct as of April 2020
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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