Covid-19 pandemic and its impact on your business - some relief available.

Challenge

Now is a challenging time for all businesses. Small and medium enterprises (SMEs) have less buffer and protection than others. Many SMEs are experiencing serious cash flow issues. As an SME you may not be able to pay your rent now or very soon. It is NOW time to act.

Recognition of problems for SMEs

The Australian governments, at both Federal and State levels have recognised the need for assistance and relief for SMEs to survive the pandemic and its economic consequences.

The Federal Government has fixed SMEs as those businesses with an annual turnover under $50 million.

To help maintain employment by SMEs the Federal Government has introduced the JobKeeper scheme and has produced the National Code of Conduct for measures to be put in place for relief of commercial and retail lessees.

Relief

This relief has been legislated by the various State and Territory governments who have responsibility for leases. In NSW the Federal Government’s National Code of Conduct has been legislated by the Retail and Other Commercial Leases (COVID-19) Regulation 2020. This came into operation on 24 April 2020.

Aim of the Relief package

The Code and the Regulation impose an obligation on landlords and tenants to renegotiate the rent and other important terms of their commercial leases in good faith, in accordance with the principles set out in the National Code of Conduct, before taking any legal actions in respect of these leases. The aim is to share the financial risk and cashflow impact during the COVID-19 period between tenants and landlords. The COVID-19 period is defined as continuing until 24 October 2020.

To what kind of lease these new rules apply?

• Retail shop leases; and

• Other commercial industrial business leases such as office leases.

This Regulation does NOT apply to residential leases

Who is eligible?

• You must have entered your lease before 24 April 2020 (unless you exercised an option to renew). 

• You must at the same time:

1. qualify for the JobKeeper scheme; and 

2. have a turnover of less than $50 million in the 2018–2019 financial year - The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level.

What you can negotiate

The parties are to renegotiate the rent payable under the commercial lease, having regard to both the economic impact of the COVID-19 pandemic and the leasing principles set out in the National Code of Conduct.

Under the National Code of Conduct, landlords are required to offer rent reductions in the form of waiver foregoing rent or rent deferrals, delaying rent payment on a case-by-case basis. The amount of rent relief is to be proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period.

The principles are as follows:

• The landlord must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

• Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Tenants may not pursue this right. Regard must also be had to the landlord’s financial ability to provide such waivers.

• Rent deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater. Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the pandemic induced crisis. 

• Any reduction in statutory charges (such as the land tax) or any benefit the landlord receives such as deferral of loan payments must be passed onto the tenant in proportion.

• If negotiated arrangements under the Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring and taking into account a reasonable subsequent recovery period.

• Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under the terms of this lease, during the period the tenant is not able to trade. Landlords may reserve the right to reduce services as required in such circumstances

• The tenant should be provided with an opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes. 

• Other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), are also possible.

There are specific formulas that can be applied to find out the amount of rent reductions to which you are entitled. Relevant documents and information should also be included in your request as you must be honest and transparent and provide sufficient and accurate information during the negotiations. 

Prohibitions and restrictions – leasing principles:

Until 24 October 2020, there are some principles that apply in negotiations between landlords and tenants. These are the “prescribed actions” set out in the NSW Regulation.

These principles are here to protect both parties in these difficult times, and they are as follows:

Landlords must not:

• terminate the lease due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period);

• forfeit the lease;

• evict the tenant;

• exercise a right of re-entry;

• recover the premises;

• seek damages;

• distraint goods;

• take possession;

• apply a fee, interest or charge with respect to rent waived, and no fees, charges nor punitive interest may be charged on deferrals.

• draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period;

• seek any remedy usually available to the landlord against the tenant at common law or under the law of this State;

• increase the rent (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.

Tenants must:

• remain committed to the terms of their lease, subject to any amendments negotiated under the Code.

If those restrictions prevent the landlord taking the above-mentioned actions, it does not prevent the parties to coming to their own agreement.

Step by step process – how to proceed if you are eligible

• If you are eligible and you are in a situation where you can no longer pay your rent or you are experiencing a significant decline in your turnover, you can initiate negotiations with the landlord. In these negotiations both the tenant and the landlord will have an obligation to negotiate in good faith, according the principles that are in the National Code of Conduct.  The parties can come to their own agreement BUT the landlord will not be able to take eviction, recovery, damages and other actions prescribed in the Regulation against the tenant. 

• If an agreement is reached, the best practice would be that the landlord and the tenant, as well as all other parties, such as guarantor, sign a confidential Deed to record the term of their agreement.

• From the negotiations the tenant should be provided with the opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral. This concession should be recorded in the form of variation of the lease to extend the term of the lease.

• If you cannot reach an agreement, either party can seek mediation. Mediation will be mandatory for commercial industrial business and will take place under the auspices of the NSW Small Business Commissioner. Only after the NSW Small Business Commissioner certifies that mediation has failed, may the landlord seek to enforce or terminate the lease.

• If mediation is not successful the landlord may attempt to enforce the lease by Court proceedings. For this the NSW Small Business Commissioner will have to certify failure and explain why. Even in this case the principles of then national Code will still apply to protect the tenant’s business during the COVID-19 pandemic.

If you cannot reach an agreement by negotiations or mediation, and need to go to Court

Failing mediation a landlord may seek to enforce the lease against the tenant by litigation. In such a case the Court must also consider the leasing principles set out in National Code of Conduct before deciding on an order in relation to any of the following:

• Recovery of possession of premises or land from a tenant;

• Termination of commercial lease by landlord; and

• Exercise or enforcement of another right of a landlord of premises or land.

It is important to note that the NSW Regulation will not prevent any action not related to COVID-19 (i.e. damages to the premises).

The NSW Regulation will cease to operate on 24 October 2020

Please reach out to us at Hillman & Associates if you need help. We can help determine how much rent reductions you could claim and negotiate with your landlord on your behalf.

You can contact us at:

info@hillmanlawyers.com.au

+61 2 9232 8392