18/05/2020

As of 18 May 2020

The economic consequences of COVID-19 have had a major impact on the ability of organisations to generate cash flow and pay ongoing liabilities, including rent.

Various State and Territory Governments have recently implemented laws to assist in renegotiating the terms of commercial leases where lessees have been effected by COVID-19. These laws bring into effect the Australian Government’s National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (Code). The Code sets out guiding principles for the States and Territories to reflect in legislation and for negotiating temporary amendments to commercial leasing arrangements. It also provides for cash flow relief to certain lessees during the COVID-19 pandemic and for a reasonable recovery period afterwards. The Code aims to create good faith leasing principles between landlords and tenants of commercial tenancies that are suffering financial stress or hardship due to COVID-19.

This article is intended as a broad guide to help charities and not-for-profit organisations determine:

  • whether your organisation is eligible to negotiate temporary rental relief (and receive other protections) pursuant to the measures that have been implemented in your State or Territory; and if so,
  • what lease terms can be negotiated and amended.

This article does not contain an exhaustive analysis of all commercial lease relief measures in each jurisdiction. If you believe rental relief may be available to your charity or not-for-profit organisation, we recommend you seek legal advice to determine the application of the applicable legislation to your organisation’s particular circumstances.

What is happening in each State and Territory?

New South Wales, Victoria, South Australia and Tasmania have introduced regulations to assist organisation’s with renegotiating the terms of commercial leases where lessees have been affected by COVID-19 (Regulations). These Regulations address the most significant principles of the Code and outline specific measures for temporary rent relief, including proportionate rent reductions, waivers and deferrals.

At present, Queensland, Western Australia, the Australian Capital Territory and the Northern Territory have introduced some legislation to varying degrees, but we are still waiting for these jurisdictions to implement specific regulations to give more fulsome effect to the Code. For example, Western Australia has introduced broad legislation that prohibits landlords undertaking certain conduct and enables regulations to be created to implement the principles of the Code. However, the regulations themselves have not yet been implemented.

As such the focus of this article is the Regulations adopted in New South Wales, Victoria, South Australia and Tasmania and the legislation so far adopted in Western Australia.

Do the relief measures apply to your organisation’s tenancy?

Your organisation’s ability to benefit from the relief measures will vary depending on the jurisdiction. The threshold matters in each State where Regulations have been implemented centre around the economic impact of COVID-19 on your organisation. Broadly speaking, your charity or not-for-profit may be able to access rental relief if:

  • it qualifies for the Australian Government’s JobKeeper scheme; and
  • had turnover less than $50 million in FY2018-19.

Another important factor is the type of lease your organisation has. Again, this varies depending on the jurisdiction. For example, in New South Wales the applicable Regulations generally cover retail shop leases and leases for commercial purposes (but exclude certain agricultural leases and leases entered into after 24 April 2020).

For the States that have introduced specific legislation relating to the Code, access to JobKeeper is a clear criterion, and one we anticipate being adopted by the other States and Territories should they follow the path of New South Wales, Victoria, South Australia and Tasmania. For a preliminary assessment of whether your charity or not-for-profit is eligible for JobKeeper, you can use the Gilbert + Tobin’s COVID-19: Relief Measures App.

How can the relief measures help my organisation?

In New South Wales, Victoria, South Australia, Tasmania and Western Australia, if the Regulations apply to your organisation, you can seek to renegotiate rent and other terms of your organisation’s commercial lease. This must be done in accordance with the parameters set out in your State or Territories’ Regulations, with any renegotiation undertaken in good faith.

The foundation for any lease renegotiation will be the extent of the economic impact of the COVID-19 pandemic on your organisation, along with the principles set out in the Code.

For charities and not-for-profit organisations eligible for relief, the following principles are likely to be the most significant in any negotiations. For States and Territories where the Code has not been implemented through specific legislation or has only been implemented generally, the relief avenues available will vary and have not been addressed below.

Principle under the Code What does it mean for my organisation in New South Wales?

Proportionate reductions in rent

(Code – Principle 3)

Your organisation is entitled to renegotiate a reduction in rent that is proportionate to the reduction in your organisation’s trade during the COVID-19 pandemic period.  For example, if your organisation has experienced a 30% reduction in trade, it is entitled to 30% cash flow relief. Reductions in rent are available through rental waivers and rental deferrals.

You should be prepared to substantiate your organisation’s reduction in trade with appropriate financial data and business records.

Rental waivers

(Code – Principle 4)

Your organisation is entitled to renegotiate at least half of its rent reductions through rental waivers. A rental waiver means that your organisation will never need to pay the amount waived. For example, if your organisation has experienced a 30% reduction in trade, a minimum of 15% of your rental relief must be provided through a rental waiver.

Rental deferrals

(Code – Principle 5)

Your organisation is entitled to have the rest of its rent reductions provided through rental deferrals. Your organisation will eventually need to pay back the amount deferred. For example, if your organisation has experienced a 30% reduction in trade, a maximum of 15% of your rental relief can be provided through a rental deferral.

Landlords sharing benefits

(Code – Principle 7)

Where your organisation’s landlord receives a benefit from the deferral of loan repayments (whether provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other deferral of loan repayments), the benefit should be shared with your organisation in a proportionate manner.

Waiving other expenses

(Code – Principle 8)

Your organisation’s landlord should seek to waive any other expenses or outgoings payable by your organisation under lease terms while your organisation is not able to trade. For example, this may include utilities, council and water rates, body corporate fees and insurance. However, it is important to note that the landlord reserves the right to reduce such services as required.

Repayment

(Code – Principle 9)

If any negotiated arrangements require repayment by your organisation, repayment should occur over an extended period of time so that your organisation is not faced with undue financial burden. Repayment should not commence until either the COVID-19 pandemic ends or the existing lease expires (whichever comes first).

Fees, interest and other charges

(Code – Principle 10)

Your organisation’s landlord should not charge fees, interest or other charges in relation to any rent waived or deferred.

Lease term extension

(Code – Principle 12)

Your organisation should be provided with an opportunity to extend its lease, so it has additional time to trade on existing lease terms.
Principle under the Code What does it mean for my organisation in Victoria?

Proportionate reductions in rent

(Code – Principle 3)

Your organisation is entitled to renegotiate a reduction in rent. However, this is not necessarily proportionate to the reduction in your organisations trade.

The reduction should take into account:

  • the reduction in a tenant’s turnover associated with the premises during the relevant period;
  • any waiver of outgoings by the landlord;
  • whether a failure to offer sufficient rent relief will compromise the tenant’s capacity to fulfil the tenant's ongoing obligations under the lease, including the payment of rent;
  • a landlord’s financial ability to offer rent relief, including any relief provided to a landlord by any of its lenders as a response to the COVID-19 pandemic; and
  • any reduction in outgoings in relation to the premises.

Taking into account the landlord’s financial ability to provide the rent relief is a point of difference to the Code.

Rental waivers

(Code – Principle 4)

Your organisation is entitled to renegotiate rent relief with no less than 50% in the form of a waiver of rent.

Rental deferrals

(Code – Principle 5)

Your organisation is entitled to have the rest of its rent reductions provided through rental deferrals. The deferred rent does not start to become payable until the earlier of the end of the relevant COVID-19 pandemic period or the expiry of the term of the eligible lease.

Landlords sharing benefits

(Code – Principle 7)

Where your organisation’s landlord receives a benefit from the deferral of loan repayments (whether provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other deferral of loan repayments), the benefit should be shared with your organisation in a proportionate manner or the landlord must reimburse the excess amount to the tenant as soon as possible.

Waiving other expenses

(Code – Principle 8)

Your organisation’s landlord should seek to waive any other expense or outgoings payable by your organisation under lease terms while your organisation is not able to trade. For example, this may include utilities, council and water rates, body corporate fees and insurance. However, it is important to note that the landlord reserves the right to reduce such services as required. However, there is no entitlement to a reduction in outgoings payable by a tenant.

Repayment

(Code – Principle 9)

If any negotiated arrangements require repayment by your organisation the landlord must not request payment of any part of the deferred rent until the earlier of 29 September 2020 or expiry of the term of the lease (before any extension agreed under the Regulations).

Fees, interest and other charges

(Code – Principle 10)

Your organisation’s landlord should not charge fees, interest or other charges in relation to any rent waived or deferred.

Lease term extension

(Code – Principle 12)

Your organisation should be provided with an opportunity to extend its lease, so it has additional time to trade on existing lease terms. The landlord must offer to extend the term of the lease on the same terms and conditions as applied before the commencement of the Regulations for a period equivalent to the period for which the rent is deferred.
Principle under the Code What does it mean for my organisation in South Australia?

Proportionate reductions in rent

(Code – Principle 3)

Landlords are not required to provide any reduction in rent. Accordingly, any reduction in rent will be subject to negotiation between the parties.

Rental waivers

(Code – Principle 4)

There is no obligation on the landlord to decrease rent by way of a waiver based on the tenant’s reduction in turnover caused by COVID-19.

Rental deferrals

(Code – Principle 5)

There is no obligation on the landlord to defer rent based on the tenant’s reduction in turnover caused by COVID-19.

Landlords sharing benefits

(Code – Principle 7)

The passing on of any reduction in statutory charges and any deferral of loan payments will be subject to negotiation between the parties.

Waiving other expenses

(Code – Principle 8)

There is no obligation on landlords to waive the recovery of outgoings or other expenses under the lease during the period that the tenant is unable to trade from the premises. A waiver of outgoings or other charges during a period where the tenant is unable to trade will be subject to negotiation between the parties.

Repayment

(Code – Principle 9)

-

Fees, interest and other charges

(Code – Principle 10)

-

Lease term extension

(Code – Principle 12)

-
Principle under the Code What does it mean for my organisation in Tasmania?

Proportionate reductions in rent

(Code – Principle 3)

Your organisation is entitled to renegotiate a reduction in rent proportionate to the reduction in your organisation’s trade during the COVID-19 pandemic period.  For example, if your organisation has experienced a 30% reduction in trade, it is entitled to 30% cashflow relief. Reductions in rent are available through rental waivers and rental deferrals. You should be prepared to substantiate your organisation’s reduction in trade with appropriate financial data and business records.

Rental waivers

(Code – Principle 4)

Your organisation is entitled to renegotiate rent relief with no less than 50% in the form of a waiver of rent.

Rental deferrals

(Code – Principle 5)

Your organisation is entitled to have the rest of its rent reductions provided through rental deferrals which is amortised over two years or the remaining lease term, whichever is greater.

Landlords sharing benefits

(Code – Principle 7)

Where your organisation’s landlord receives a benefit from the deferral of loan repayments (whether provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other deferral of loan repayments), the benefit should be shared with your organisation in a proportionate manner.

Waiving other expenses

(Code – Principle 8)

Your organisation’s landlord should seek to waive any other expense or outgoings payable by your organisation under lease terms while your organisation is not able to trade. For example, this may include utilities, council and water rates, body corporate fees and insurance. However, it is important to note that the landlord reserves the right to reduce such services as required.

Repayment

(Code – Principle 9)

If any negotiated arrangements require repayment by your organisation, repayment should occur over an extended period of time so that your organisation is not faced with undue financial burden. Repayment should not commence until either the COVID-19 pandemic ends or the existing lease expires (whichever comes first).

Fees, interest and other charges

(Code – Principle 10)

Your organisation’s landlord should not charge fees, interest or other charges in relation to any rent waived or deferred.

Lease term extension

(Code – Principle 12)

Your organisation should be provided with an opportunity to extend its lease, so it has additional time to trade on existing lease terms.
Principle under the Code What does it mean for my organisation in Western Australia?

Proportionate reductions in rent

(Code – Principle 3)

Landlords are not required to provide any reduction in rent. Accordingly, any reduction in rent will be subject to negotiation between the parties.

Rental waivers

(Code – Principle 4)

There is no obligation on the landlord to decrease rent by way of a waiver based on the tenant’s reduction in turnover caused by COVID-19

Rental deferrals

(Code – Principle 5)

There is no obligation on the landlord to defer rent based on the tenant’s reduction in turnover caused by COVID-19.

Landlords sharing benefits

(Code – Principle 7)

The passing on of any reduction in statutory charges and any deferral of loan payments will be subject to negotiation between the parties.

Waiving other expenses

(Code – Principle 8)

There is no obligation on landlords to waive the recovery of outgoings or other expenses under the lease during the period that the tenant is unable to trade from the premises. A waiver of outgoings or other charges during a period where the tenant is unable to trade will be subject to negotiation between the parties.

Repayment

(Code – Principle 9)

-

Fees, interest and other charges

(Code – Principle 10)

Your organisation’s landlord should not charge fees, interest or other charges in relation to any rent waived or deferred.

Lease term extension

(Code – Principle 12)

-

Are there any prohibitions or restrictions in place?

Under the legislation introduced in a number of States and Territories, a number of prohibitions and restrictions on commercial leases have also been brought into effect. Again, these vary slightly depending on the jurisdiction but may include that:

  • your organisation’s landlord must not increase your organisation’s rent;
  • if your organisation fails to pay rent, its landlord must not, for that reason, evict your organisation from the premises, exercise a right of re-entry to the premises, recover the premises, require a payment of interest or fee for unpaid rent, recover the security bond, terminate the lease, or issue proceedings in a court or tribunal against your organisation for failing to pay rent or outgoings; and
  • if your organisation’s landlord is entitled to reduced payments for land tax, statutory charges (such as local council rates) or insurance, your organisation does not have to pay such charges to the extent of the reduction the landlord is entitled to.

However, any other lawful action to which your organisation and its landlord is agreeable is permitted. For example, your organisation and its landlord can agree to terminate the commercial lease.

It is important to note that your organisation’s landlord can take action against your organisation on grounds that are not related to the economic impacts of the COVID-19 pandemic. For example, your organisation’s landlord may terminate the lease if your organisation has breached the lease by damaging the premises or if your organisation fails to vacate the premises after the lease has expired. 

What if my organisation’s landlord will not agree to rent reductions and renegotiated terms?

If your organisation has attempted to negotiate in good faith with its landlord but the landlord will not agree to renegotiate rent and lease terms in accordance with your organisation’s entitlements, you may be able to apply for mediation. If mediation fails to resolve the dispute, legal proceedings may be commenced. If your organisation finds itself in this position, it should seek legal advice.

How can we help?

If your charity or not-for-profit is interested in determining how it might be able to access rental relief under the applicable legislation, our team of charity and not-for-profit law experts would be pleased to help you determine what Government rental relief measures are available. We can also provide advice on eligibility for other Government relief measures, as well as the legal impacts of COVID-19 on your organisation’s governance and operations

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