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Never too late to document COVID-19 rent relief given to your business

If a business has suffered due to the COVID-19 pandemic, it may be eligible to negotiate a discount or deferral of rent with a landlord.

This article outlines the eligibility threshold and process requirements under the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles during Covid-19 (Code) and explains why it is important to document the final agreed position between landlords and tenants. The Cleardocs Rent Relief (COVID-19) product can be used to document this arrangement and record the changes to the lease. This product is suitable for both landlords and tenants of commercial leases.

The landlord may or may not be an SMSF. For a description of SMSF compliance requirements and how this product can assist your please see our other article here.

Michael McDonald and Alexandra Hodsman, Maddocks Lawyers

Mandatory Code for Commercial Tenancies

Legislation has been enacted in each State and Territory which implements the provisions of the Code in that State and Territory. While that legislation substantially mirrors the principles in the Code, there are differences in the legislation enacted by each State and Territory, and it is the specific provisions of the legislation in each State or Territory which will apply.

The Code applies to all commercial tenancies (including retail, office and industrial) where the tenant qualifies for, and is a participant in, the JobKeeper scheme and has a turnover of less than $50 million a year

The Code will apply to eligible tenants notwithstanding those tenants may have previously negotiated rent reductions or other variations to their lease terms with their landlords. If those existing arrangements provide for less rent relief or impose repayment obligations which are not consistent with the Code, tenants will be able to renegotiate those arrangements with landlords in accordance with the terms of the Code.

The following principles apply to negotiations for rent relief between landlord and tenants and the Code confirms that the principles should be applied as soon as practicable on a case by case basis:

  • Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable having regard to the reduction in the tenant's trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
  • Waiver and deferral also includes other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), or any such other commercial outcome or agreement reached between the parties.
  • Rental waivers must constitute no less than 50% of the total waiver or deferral agreed (unless agreed otherwise) and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise a tenant's capacity to fulfil their ongoing obligations under the lease agreement.
  • Any amount of reduction in rent provided by a waiver may not be recouped by the landlord over the term of the lease.
  • Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
  • Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable by a tenant) under lease terms during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
  • 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.
  • No fees, interest or other charges should be applied with respect to rent waived, and no fees, charges or punitive interest may be charged on rent deferrals.
  • Landlords must not 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.
  • The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period agreed to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic period concludes.
  • There is a freeze on rent increases (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.
  • Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

Benefits of recording the arrangements

It would be prudent from a tenant's perspective to formally document the arrangement or variation in order to take advantage of the protection offered by the Code and relevant State-based regulations. Furthermore, making the relief binding may prevent or mitigate any potential claim by the landlord for unpaid rent in the future as well as afford a tenant business greater certainty.

If the document is not legally binding, the landlord may be able to seek payment of any waived rent plus interest at penalty rates. The Cleardocs Rent Relief (COVID-19) product is legally binding and takes the form of a deed of variation to the existing lease and therefore meets this requirement.

It is also important to document the agreement from a landlord's perspective. This is because a tenant will be obliged to comply with its terms and a material failure by the tenant to abide by the substantive terms of the lease will not prohibit the landlord from taking enforcing its rights under that agreement.

Can Cleardocs assist with the required documentation? Yes.

The Cleardocs' Rent Relief (COVID-19) product provides a tenant and a landlord with the required documentation they need in order to continue to comply with the Regulations. The product can be accessed here.

The 'rent relief' offered by the product includes:

  • deferral or a partial waiver of outgoings;
  • deferral, partial waiver or full waiver of rental payments; and/or
  • an extension of the lease term if a deferral of rent is being provided.

This product can be used to retrospectively document an existing arrangement between a tenant and landlord.

More information

For more information, please contact Maddocks on (03) 9258 3555 and ask to speak to the Property team or Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw Articles on a range of topics, including the following topics which you may find relevant:

 

Lawyer in Profile

Paul Ellis
Paul Ellis
Senior Associate
PH: 61 3 9258 3524

Paul is a Senior Associate in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.

Paul's key areas of practice include:

  • Australian Consumer Law;
  • credit and securities law;
  • commercial law and contracting;
  • government contracts; and
  • trust and superannuation law.

Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.