KEY TAKE OUTS:
- The NSW state government is proposing to adopt the National Cabinet Mandatory Code of Conduct in relation to all Affected Leases.
- Regulations have been published and adopted by the State Government on how to deal with your landlords or tenants through COVID 19.
The NSW Government published on Friday 24 April 2020 the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulation). This is the formal adoption by the NSW Government with effect from 24 April 2020, the National Cabinet Mandatory Code of Conduct (Code of Conduct) issued by the Federal Government on 3 April 2020. to prescribe a set of good faith leasing principles to deal with the COVDI 19 pandemic on the economy..
The Regulation operates for a period of 6 months from the effective date being 24 April 2020 or unless otherwise extended by the Government.
The Regulation refers to the National Code of Conduct is a recommendation which provides a guide on what the landlord and tenant should abide by when negotiating in Good Faith. If you are an ‘affected tenant’ as defined under the Regulations. An Affected Tenant is generally someone entitled to the JobKeeper package and turnover up to $50millon.
If your landlord or tenant refuse to negotiate the Code recommends you proceed to a binding mediation process, with Small Business Commissioner.
In summary the Code of Conduct:
- the Code recommends a proportionality principle i.e. any reduction in rent should proportionally reflect the reduction in turnover, we explain this further below;
- if a tenant has not experienced a reduction in business turnover and obviously wouldn’t fit the JobKeeper assistance there is no entitlement to rent relief and rent should continue to be paid where possible;
- Where a tenant is part of a larger group of businesses, the calculation of turnover includes internet sales and those of its subsidiaries and related entities.
- the code will provide for:
- a stop on termination of leases for non-payment of rent;
- a freeze on rent increases;
- a stop on penalties for tenants who stop trading or reduce opening hours;
- a stop on landlords passing land tax to tenants;
- a stop on landlords charging interest on unpaid rent;
- landlords to not be able to make a claim on a bank guarantee or a security deposit for non-payment of rent;
- removal of any legislative barriers or administrative hurdles to lease extensions are removed, this means that a tenant and landlord could agree a rent waiver in return for a lease extension;
- The NSW government have bought in a 25% Land tax reduction application for eligible landlords, which if charged to the tenant they must pass on any reduction in land tax benefit they receive;
- mediation in the event that landlords and their retail and commercial tenants were unable to reach agreement will be provided as needed through existing State and Territory mechanisms.
However this does not prevent the landlord from being able to enforce other parts or provisions of the lease which can lead to termination of a lease as long as it is not in relation to non-payment of the rent or revised rent during the Prescribed Period i.e. for a material breach and of a substantive term for example damage to the premises or tenant fails to vacate the premises after an expiry period.
How do I work out Proportionate Reductions with my landlord or tenant?
Under the Regulations and Code, landlords must offer tenants proportionate reductions in rent payable in the form of a waiver and deferral of up to 100% of the amount ordinarily payable on a case by case basis.
Rent Waivers must constitute no less than 50% of the total reduction in rent payable and the balance being amortised over the balance of the lease or 24 months, whatever is greater (unless otherwise agreed by the parties).
Any benefits received by the landlord, i.e. reduced land tax, reduced insurance etc must be passed onto the tenant.
Examples of practical variations reflecting the application of the principle of proportionality may include, but are not limited to:
- Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis i.e. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.
- At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen. o Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties
- So, if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.
- However, if the lease only has another 6 months left under their term, then the tenant would still have a minimum of 12 months after the pandemic period to cover the deferral of rental payments.
The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.
If you are a landlord, where to from here?
As a landlord who has been approached by a tenant to obtain rent relief, you should ask the tenant to show their financial and “open their books” to demonstrate a reduction in business turnover.
You should also ask for comparative data from the previous 12 months. Such information might include:
- evidence that the business is eligible for the “JobKeeper” assistance and has a turnover of less than $50 million (in which case the mandatory code will apply);
- a statement of financial position, outlining income, expenses, assets and liabilities (preferably audited or certified by a chartered accountant), currently and pre-1 March 2020;
- year to date and recent financial year financial statements for the impacted location, and guarantor entity:
- P&L or Income Statement;
- Balance Sheet;
- Or any other relevant information depending on the nature of the business,
- what arrangements are currently in place for the ongoing operation of the business, such as work from home arrangements and whether staff have been stood down; and
- whether the tenant holds business interruption insurance that covers the payment of rent and outgoings and if the circumstances for a claim on that insurance have been triggered.
- Whether the tenant is permitted to trade and have chosen not to, should potential income be added back.
- Whether the tenant is part of a larger group or has internet sales i.e. an online presence where internet sales that should be added back into the turnover
It is an obligation of the tenants seeking rent relief will need to be able to justify the relief sought with reference to this information so that the relief is proportionate and reasonable.
What happens if I don’t want to negotiate as a landlord?
There is an obligation of the parties to an affected lease to formally mediate the terms of their lease during the Prescribed Period under the Regulation.
If terms cannot be negotiated in good faith, a lessor cannot enforce its rights under the lease unless or until the Small Business Commissioner has certified in writing that the mediation to be conducted (in accordance with the National Code of Conduct) has been conducted and it has failed to resolve the dispute. If legal action is commenced by the lessor to recover the premises from a lessee or terminate a lease or exercise another right under the lease, the Court will consider the application of the National Code of Conduct.
Take away message:
Make sure you review the Regulations and legal advice if you are looking to negotiate your terms of lease and out your agreement in writing. As a landlord use the guide in how to calculate reduced rent if any.
ABOUT ADRIANA CARE:
Adriana is the Managing Partner for Coutts Lawyers & Conveyancers. She acts for large commercial financial institutions in relation to corporate governance, and the provision of retail and wholesale credit and funding facilities for both the commercial and consumer market.
She also acts for a range of ADIs, finance companies, vendor introduces and equipment lessors. She acts for a number of franchisor and franchisees, as well as small property developers, builders and commercial property leases and debt recovery. Adriana has also worked in the fields of insolvency, commercial disputes and litigation and occupational.
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This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.