Understanding rent relief for commercial and retail leases

This article was current at the time of publication.

The National Cabinet Mandatory Code of Conduct (the code) outlines 14 principles for relief for commercial/retail tenants that need to be incorporated within each state or territory's legislation. At the time of writing, only Western Australia and Queensland were yet to enshrine the code in law.

What is immediately clear among those that have already passed legislation is the importance of JobKeeper and financial hardship as being the threshold for an “eligible commercial lease”, and this applies to small-to-medium enterprises (SMEs) with annual turnover under $50 million.

However, just because a tenant is too large to fall within the code, doesn’t necessarily mean they don’t get a ticket to the dance.

Cabinet also encourages those with affected leases and licences excluded from the protection of the code to apply elements of the leasing principles in their negotiations.

It’s early days, but Kitty Vo, a partner at law firm Hall & Wilcox, expects some landlords to try mitigating their losses against ineligible leases more readily than those governed by legislation.

One code: 8 regulations

One of the overarching challenges confronting professional services firms charged with helping to navigate tenants through the commercial rent relief conundrum is correctly interpreting eight disparate and hastily conceived pieces of legislation.

At face value, landlords must offer rent relief to an affected tenant and negotiate in good faith.

However, according to CPA Australia’s policy adviser Gavan Ord, an additional layer of complexity is how tenants with national portfolios juggle their rights and obligations across state borders, especially those that are yet to enact legislation.

As a result, Vo says trying to apply for one common position across all outlets in a national chain becomes problematic, as negotiations are conducted with different landlords under different laws.

“Institutional shopping centre landlords operate differently to mum and dad investors, and the ability to provide rent relief will also vary,” she says.

“Due to licensing arrangements unique to franchises, there will be challenges where the franchisee falls under the code, but the franchisor does not.”

‘Sufficient and accurate information’ requirements differ by state

By turning rights and obligations under leases on their heads, Vo says that under the code, existing leases have been rendered redundant during the COVID-19 pandemic. The onus is now on tenants to demonstrate proof of financial hardship for a nominated period to their landlord.

The trouble is that while there’s unanimity on what the mandatory code prohibits landlords from doing, each state takes a different approach to what constitutes “sufficient and accurate information”.

For example, South Australian legislation references financial records or statements, while some jurisdictions remain silent on the issue.

It has taken time, but Vo says landlords are recognising that under the code, at least 50 per cent of rent relief must be in the form of a rent waiver. However, the regulations do not prescribe commercial terms such as the period and quantum of rent relief, and this is where Vo is witnessing negotiations coming unstuck.

“One of the issues for tenants is determining the appropriate financial data to provide their landlord, and to what extent the tenants are obliged to provide the specific information requested by their landlords,” she says.

Ord says what could constitute evidence of “sufficient and accurate information”  is either information extracted from an accounting system, BAS, or that provided to a financial institution and accompanied by an APES 315 compilation report.

Notably, Ord emphasises that for the speedy and least-cost implementation of rental relief, landlords should have no entitlement to access balance sheets, profit and loss, or year-to-date financials, and nor should they require tenants to have an accountant verify their financial information.

Similarly, where the tenant is demonstrating reduced turnover through actual data, the landlord should not be entitled to cash flow or other revenue projections. While Ord notes that South Australia and Victoria are clear on the type of financial information landlords are not entitled to ask for, other states have either provided only very general guidance, or have been silent.

Time is running out

With some landlords – used to wielding their bargaining power and still in denial about the broken model for rentals in the retail sector – negotiations appear to be slow.

However, Vo warns those that have chosen to wait and see in the hope there will be more government relief, could run out of time. Given the absence of any obligation for both parties to agree, she suspects many cases could be headed to mediation.

A corresponding amount will likely remain unresolved when the pandemic ends.

“Under this climate, it is difficult for tenants to forecast turnover, but if the parties have not reached an agreement and the tenant does not recommence rental payments after the moratorium period, landlords may exercise their rights under the lease,” she says.

“Already playing hardball, some landlords have been quick to issue breach notices.”

In the case of Victoria’s legislation, the COVID-19 Omnibus (Emergency Measures) Act 2020, passed on 23 April 2020, the recovery period was not factored in.

For example, while the relevant period extends from 29 March to 29 September 2020, the code refers to both the pandemic period in which the JobKeeper scheme is operational and a subsequent “reasonable” recovery period.

Flexibility is paramount

While state-based regulations do deviate from the mandatory code, what pleases Nicola Carnevale, a property lawyer at Madgwicks Lawyers, is the amount of latitude parties appear to have in reaching agreements, depending on their circumstances.

However, she warns that state and territory legislation may encounter challenges when navigating leases that are close to expiry, and those that will expire before the end of the two-year rent deferral repayment period.

Assuming a tenant does not want to renew a lease, Vo says landlords will be left to choose between the lesser of two evils: either deferral or lease termination. Given the likelihood of heightened rent deferrals next year, she urges both parties to build sufficient flexibility into their negotiations.

Vo says: “Rent deferral, in reality, is the deferral of pain for the tenant.”

“Therefore, given economic uncertainties, the tenant must ensure that future earnings will be sufficient to [meet] repayments. It’s in the best interests of both parties to reach a mutual agreement in a timely manner, rather than expending further time progressing to mediation.”