Introduction
With the new Leasing Code of Conduct coming into effect last week, many retail and commercial tenants across the country have a chance to breathe a long-awaited sigh of relief.
To be clear, the Code doesn’t promise any magical solutions. Nor does it apply to everybody. However, it does offer a means for some businesses to move forward through (and hopefully out of) the current crisis.
There are a number of resources out there to help businesses work out what rental relief they are eligible to receive. We’ll briefly discuss these further below, but you can also check out our Fact Sheet here for information on how the Code works.
But what about the rest of us – the ones who don’t qualify for relief under the Code? What about –
- the retailers who have managed to keep their losses below the 30% threshold;
- the businesses who don’t qualify for the JobKeeper allowance; and
- the tenants who still have to pay a fixed and unsustainable rate of rent?
Well, this is for them too.
What relief is available?
The purpose of the Code of Conduct is to impose a set of good faith leasing principles for application to commercial tenancies between landlords and tenants.
For those who qualify for the JobKeeper allowance, the Code requires:
- landlords to provide rent relief that is proportionate to the tenant’s loss of turnover; and
- tenants and landlords to share certain information, act in good faith, and communicate openly with each other to determine the appropriate rent relief that should be provided.
For example – Inga’s business (which was granted JobKeeper) suffered a turnover reduction of 50% as a direct result of Coronavirus, meaning her landlord should agree to apply rental relief to 50% of her total rental amount. As her normal rent was $10,000 per month, her landlord should allow her to pay only $5,000 per month moving forward.
Rental relief can be offered in two ways:
1. Rent Waivers, which must account for at least 50% of the rental relief unless the tenant agrees otherwise. The tenant will not be required pay the waived amount; and
2. Rent Deferral, which must account for the non-waived portion on the rental relief. The tenant will be required to pay back the landlord for any deferred rent at a later date.
Using the above example, this would mean that $2,500 of Inga’s rent might be waived outright (unless she can negotiate more). The remaining amount would then be repaid over a specific period, once the COVID-19 pandemic has ended.
When you haven’t suffered enough
Whilst nearly every business across every industry has been experiencing some financial downturn as a result of COVID-19, not all have suffered the 30% revenue loss that is required to be eligible for JobKeeper. This is significant as, to be clear, you need to be eligible for the JobKeeper allowance to qualify for mandatory relief under the Code.
Take Mandy’s story, for example.
When COVID-19 emerged as an issue, business owners like Mandy (not her real name) did everything they could to adapt to the new reality.
Mandy operates a casual-fast-food restaurant in country Victoria. She has been set up with UberEats and other delivery platforms for years, engages employees to conduct some delivery services, and always found that take-away orders make up a large portion of her revenue.
With luck on her side, a few process changes and some clever marketing, Mandy was able to limit her post COVID-19 losses to a 25% reduction from the previous year’s revenue.
However, this is still an enormous loss for Mandy. And now, from what she has read online, it’s not a big enough loss to qualify for JobKeeper and relief under the Code.
In the meantime, Mandy’s current rental amounts are unsustainable to keep her business afloat.
JobKeeper – the alternative test
If you are struggling with rent, it is worth leaving no stone unturned to get JobKeeper. This is because, at this stage, being eligible for the JobKeeper allowance is the only way to benefit from the Code.
What is this standard test?
Well, for an ordinary business with an aggregate turnover of $1 billion or less, JobKeeper may be available where the actual or projected turnover for the 2020 month or quarter is at least 30% less than the same 2019 month or quarter.
However, if (like Mandy) you do not pass this standard test, then the ATO has provided an alternative test. If you can show the ATO that there is something “out of the ordinary” about the comparison between the 2020 and 2019 turnover periods, then the ATO may allow you to compare the current period with a more appropriate period.
In other words:
- if something unusual (i.e. drought, industrial action, or personal hardship) caused your April 2019 turnover to be unusually low;
- if your business is less than a year old;
- you experienced high growth this year; or
- if the nature of your business involves irregular dips and waves in turnover,
- then you still may be eligible to receive JobKeeper if you can show a 30% reduction compared to a different and more appropriate period, such as February 2020 compared to March 2020
What if I’m still ineligible for JobKeeper?
Receiving JobKeeper means your landlord has to provide rental relief in accordance with the Code. However, even if you are not eligible for JobKeeper, you can still ask.
I know what you’re thinking. Why would my landlord reduce my rent if they don’t have to? Well, there are a few reasons why a Landlord may accept such a request:
- Having a paying tenant at the premises may be better than having no tenant at all;
- Your landlord should want to ensure there is a full-paying tenant in the premises at the end of the COVID-19 crisis; and
- The landlord may prefer to engage with a tenant with whom it has a positive ongoing relationship.
There are a few other important things to keep in mind when asking for rent relief.
The first is that the landlord may be under no obligation to help you in any way. You therefore need to ask for – and not demand – assistance.
Secondly, a lot depends on what you’re requesting, how you request it, and why. You may, for example, ask for a reduction in rent – but you could also ask for deferred rent, additional marketing support, updated rent-review processes, and other forms of assistance. What you request should reflect what you have suffered, and you may expect your landlord to require evidence to support your claimed loss.
Finally, you need to be careful not to openly breach your lease without the landlord’s consent. Even in these times, you still may be fully liable for a breach of the lease.
You should therefore seek legal advice before acting in a way that may be contrary to your agreement.
We’ve also put together a free resource to help tenants (who do not qualify for the Code) draft a letter to their landlord. Follow this link to put together a draft letter – but remember to get it checked by a lawyer before sending!
What if my landlord says no?
You might still have other options if your landlord refuses to provide any rental assistance.
1. Check your insurance policy
Review your policy for business interruption insurance and speak to your broker or your insurer for information on whether you can make a claim in relation to COVID-19.
2. Check your lease for ‘force majeure’ provisions
Sometimes a lease will contain a clause allowing either party to cease or suspend performing its obligations on the occurrence of an unavoidable event (like an ‘Act of God’, or a pandemic). These clauses are known as ‘force majeure’ provisions.
Important: whilst force majeure provision could be very useful in allowing you to avoid paying rent during COVID-19, they also:
- are not contained in every lease;
- do not all work the same way; and
- can sometimes force the tenant to abandon the premises altogether, if they rely on the provision.
You should always talk to a commercial lawyer before acting on a force majeure provision.
3. Remember that the situation is always changing
New legislation may shine a light on different ways the Code may be applied, or different kinds of relief that may be provided to tenants who are not eligible for JobKeeper.
For example, we are still awaiting clarity on whether JobKeeper applies to tenants in a sub-lease in the same way as a standard lease.
Legalite will be keeping up with all new developments as they happen – so always remember to check into our blog page regularly!
What we do
Legalite is always on hand to help with:
- advising what information to provide a landlord for the purpose of qualifying for rent relief;
- negotiating an appropriate rental waiver;
- asking a landlord for rental assistance;
- reviewing your lease for force majeure provisions; and
- advising on any further updates to COVID-related legislation or government policies.
If you have any questions or would like to discuss further, you can book into a free 15 minute consultation here.