COVID-19 and Paying the Rent

Can you get rent relief for your business offices?

If your offices are occupied under a commercial lease and your business has been affected by the COVID-19 pandemic, the rent relief schemes instituted by the various State and Territory Governments may afford some assistance.

What are the Rent Relief Schemes?

Following an announcement in early April by the Prime Minister, National Cabinet formalised the Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (Code) which is a mandatory code setting out the principles for small and medium enterprise (SME) tenants to negotiate amendments to their commercial and retail leases with their landlords.  Subsequently, NSW and Victoria have each introduced a rent relief scheme to deal with hardship experienced by commercial tenants that have had income substantially reduced, which in turn has affected the ability of those business to pay rent.  Unsurprisingly, those Schemes are substantially the same.

Does your business qualify?

The loss of income and consequent inability of SMEs to pay full rent must be as a direct result of the COVID-19 situation.  If your business is a tenant under a commercial lease and it qualifies for the JobKeeper program and has an annual turnover of less than $50 million, it should qualify.  To qualify for the JobKeeper program turnover must have decreased (or is likely to decrease) by a minimum of 30 per cent.

What is provided by the Scheme?

The Scheme provides for:

• a 6-month moratorium on evictions for non-payment of rent by SMEs commencing on 29 March 2020
• a freeze on rent increases during the moratorium
• negotiated waiver or deferral of rental payments which is proportionate to the reduction in the tenant’s income as a result of the COVID-19 situation, and
• a mediation service where negotiations between commercial tenants and landlords are not successful.

How do we begin the process?

Begin early and don’t delay!  SME tenants should apply and be accepted for the JobKeeper program.  At the same time, they should make contact with their landlords and notify them of their hardship circumstances.  The key principles for the negotiations are:

• The parties should work together cooperatively and each recognise the commercial position of the other.
• The negotiations must be undertaken in good faith with honesty and transparency.
• Any arrangement which is negotiated will only be temporary for the time that the COVID-19 situation persists – but may last longer depending on the effect on the tenants business.
• Each negotiation is to be on a case-by-case basis and take into account the circumstances of both the tenant and the landlord to the extent they can be accommodated.
• The parties should assist each other in dealing with banks and other financiers and utilities suppliers.

What information do we need to provide?

It should be sufficient to provide evidence that JobKeeper has been applied for and has (or will) be granted.  However, in the interests of transparency, if the landlord seeks some verification of reduction in income or turnover, serious consideration should be given to providing it – perhaps on the basis of a non-disclosure undertaking.  Any other factors affecting the ability to pay full rent should be disclosed.

What relief can we expect?

Unless all income to your business ceases, it is unrealistic to expect that the landlord will simply waive the rent for a period.  You should have a genuine estimate of what the business is able to pay and put that position forward.  It will not assist the negotiations if the landlord believes it is being asked to accept lower rent than the tenant can reasonably pay.  You should also have a proposal for payment of the shortfall in the future when the circumstances of the business improve.

Documenting it

The temporary arrangements should be put into writing and signed by both parties.  Obviously, the agreement should be crystal clear and leave nothing for any misunderstanding at a later date.  It is important to specify the amount of the reduced rent and when rental payments will be made, the period for which the arrangements will stand, the conditions for review of the arrangements, how the shortfall is to be paid after the COVID-19 situation ends and any other issues which the parties consider might forma a basis for dispute.

What if we cannot agree?

If a negotiated arrangement cannot be achieved the parties will need to submit to mediation.  That may result in an outcome which is less satisfactory to one party than was being offered in negotiations.  If the landlord is intractable, it will be unable to act on any eviction proceedings for at least 6 months and there will be a deferral of those rights under the lease.

How long will the Code and the State schemes be in force?

Certainly as long as the JobKeeper scheme, although the situation is clearly open-ended and will depend upon many factors including the state of the economy, the duration of “lock-down” and the world-wide course of the COVID-19 pandemic etc.

How can Holley Nethercote help us?

We can review your particular situation and advise on how to approach your landlord.  We can support you in the rent relief negotiations and, importantly, we can make sure any agreement is adequately documented. We can also assist with preparation of a non-disclosure agreement for sensitive financial information requested by, or supplied to, a landlord.

Should your business be suffering catastrophic losses and you suspect that it may not survive, we can provide specific advice on relaxed directors’ obligations during COVID-19, relaxed trading whilst insolvent provisions during COVID-19, other arrangements with creditors (including formal deeds of company arrangement applicable during COVID-19) and administration and insolvency.

Read part 2 of this blog: COVID-19 and Paying the Rent.

Author: Tim Dixon, Special Counsel