Around Australia, retail and commercial tenants have been thrown into disarray as COVID-19 restrictions have disrupted operations.
In response, landlords are working to help those affected.
Aside from this, governments have stepped in.
On April 3, National Cabinet issued a mandatory code of conduct which applies to commercial leases where tenants are small or medium enterprise (SMEs) who have suffered hardship as a result of COVID-19. For the purposes of the code, an SME is a business whose annual turnover does not exceed $50 million. Enterprises are considered to have suffered hardship where they are eligible for the Commonwealth JobKeeper program.
Overall, the code requires landlords and tenants to act in good faith and to negotiate mutually workable arrangements. It also includes tenant protection in specific areas.
- a moratorium on lease terminations which occur by reason of non-payment of rent
- entitlement to a reduction in the amount of rent payable which is proportionate to any reduction in the tenant’s trade; and
- a freeze on rent increases.
Generally speaking these protections apply during the COVID-19 pandemic and any subsequent ‘recovery period’.
The reduction in rent referred to above can take the form of either outright waivers of amounts owing or simple deferrals of payments. However, at least 50 percent of the reduction must take the form of an outright waiver of amounts payable.
Overall, the code provides a useful roadmap from which parties can negotiate.
Nevertheless detailed areas of its implementation are creating headaches for landlords. These were outlined by Virginia Briggs, Managing Partner, Infrastructure Construction & Property at law firm Minter Ellison during a webinar hosted last week by the Property Council of Australia.
Whilst the code provides nationally consistent principles, its implementation at a state level has been inconsistent.
Thus far, only five out of eight states/territories have issued regulations to support the Code’s introduction – NSW, Victoria, ACT, Tasmania and South Australia. Regulations in Queensland are likely this week. In the NT, Briggs says it is likely that no regulations are coming at all. In WA, the Government has been silent about regulations.
Among those states who have regulations, inconsistencies apply across several areas.
As mentioned above the eligibility criteria which SMEs must satisfy in order to receive protection under the code are that:
- their annual revenue must be less than $50 million; and
- they must have suffered hardship as defined by their eligibility for the Federal Government’s JobKeeper program.
On both criteria, rules vary across states.
In Victoria, ‘revenue’ for the purposes of the $50 million threshold includes any payments received though government subsidies such as JobKeeper. In New South Wales, the regulations are silent on whether JobKeeper and other subsidies are counted.
In Victoria, meanwhile, SMEs must be an active participant in JobKeeper in order to be considered to be eligible for the program as per the second criteria above. In New South Wales, tenants need only qualify for the program and need not necessarily have successfully applied to participate. As a result, where tenants in NSW are not participating in JobKeeper, landlords need to assess whether or not these tenants would in fact have qualified for Jobkeeper should they have chosen to participate. Exactly what evidence landlords would need to assess this is not clear.
According to Briggs, differences such as these create complications for landlords who either have operations in multiple states or who negotiate agreements with tenants whose leasing footprint spans multiple jurisdictions.
Beyond that, areas of the Code are causing confusion.
Under the Code, aforementioned protections apply during the COVID-19 pandemic period and any ‘recovery period’.
Exactly how this recovery period needs to be defined is unclear.
In part, Briggs says this is addressed through state regulations. Again, however, there are inconsistencies between states. NSW has mandated a six-month period. In other states, periods are different.
Next, there is uncertainty around the proportion of rent which can be deferred as opposed to that which must be waived entirely.
As mentioned above, the Code requires that at least half of the rent reduction to which tenants are entitled must take the form of a complete rental waiver as opposed to mere deferment of payments.
There is confusion, however, about circumstances under which waivers should constitute a larger proportion of rent reductions than fifty percent. Under the code, this should occur, ‘in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement’. In working out whether or not this should actually happen, however, ‘regard must also be had to the landlord’s financial ability to provide such additional waivers’.
Exactly how these competing tenant/landlord financial considerations should be weighed, Briggs says, is unclear.
Another area of difficulty involves a principal in the code which enables tenants to extend the term of their lease for any equivalent period of the rent waiver and/or deferral period. Under this principal, tenants whose rent waiver/recovery period lasts for six months, for example, are entitled to seek an equivalent six month extension on their lease.
Largely speaking, this is intended to provide tenants with opportunities for additional time to trade on existing lease terms during the COVI-19 recovery period. Nevertheless it can present practical difficulties for landlords in cases where either the space in question has been promised to an alternative tenant or the tenant in question is a foreign owned company. In the latter case, Briggs says there may be cases where such extensions require approval for the Foreign Investment Review Board.
Next, there are questions about what happens when parties enter into agreement for short timeframes which do not cover the whole COViD-19 period. Where this happens, there is uncertainty about whether or not the amount of rental relief being offered can be calculated on a rolling basis which takes into account tenant revenue at each rollover period. In NSW, the answer to this question is yes. In Victoria, Briggs says there is suggestion in the regulations which requires the landlord to offer relief for the full COVID-period irrespective of any tenant revenue situation at any rollover period.
Finally, there is confusion about whether or not agreements can allow for landlords to claw back rental relief where tenant revenue subsequently turns out to be less badly impacted compared with what was originally expected. This could happen where sections of the economy reopen earlier than anticipated.
According to Briggs, Minter Ellison’s view is that such clawbacks are possible for any portion of the rent has been waived outright but is more difficult for rent which been deferred rather than waived.
Brigg’s comments come as commercial landlords throughout Australia are dealing with challenges in managing both the code and a large volume of requests for rental relief.
In the aforementioned webinar, John Bond, Executive Chairman, at Primewest and Luke Briscoe, Managing Director – Office & Logistics, Real Estate at AMP Capital, shared their experiences.
Speaking about his own firm, Bond said Primewest experienced an avalanche of requests in early April.
Thus far, the firm has mostly done agreements on either a monthly or quarterly basis and has adjusted agreements according to the circumstances of the tenants in question.
A particular challenge has arisen from large-format retail tenants – a number of whom closed their doors and initially refused to pay rent.
Having spoken with tenants as the month progressed, however, Primewest was able to form a much clearer position of where it stood with regard to collections (which are improving). This included speaking with the large format retailers and reaching agreement with them.
At AMP Capital, meanwhile, Briscoe says challenges arose due to the volume of applications received (around 350) and the need to work through each application.
Initially, AMP relieved a number of retail and other small business tenants of the need to pay rent on the understanding that longer term arrangements would be negotiated after the code was released.
Whilst stressing that the industry was doing its best, Briscoe says the process is difficult for all.
“It’s very challenging to have a conversations with over 300 businesses and to ask these quite relevant questions so that we can provide the right support,” he said.
“Having spoken to a number of our peers, they are all expressing the same challenge.
“It’s fair to say that the industry is trying to make this work. But it’s going to be a challenging period and its also going to take a little longer than what many of us would like including owners and managers.”