On Sunday, the Prime Minister of Australia released a Media Statement that provided rent and eviction relief to businesses that have been impacted by the coronavirus pandemic. The Statement indicates:
The Media Statement implies that the Government will provide more detail on what to do. It also indicates that landlords and tenants should share any benefits, costs or deferral of losses in respect of the property. This raises a number of questions, listed below, that will hopefully be resolved in the detail. We will monitor future Prime Minister/Government releases for this information.
- What is the meaning of ‘financial distress’?
- What is the level of ‘financial distress’ to enable a lease to be terminated? (It is likely termination would be only for businesses in extraordinary circumstances eg. liquidation.)
- Will the tenant still owe the landlord the value of the rent not paid for the period?
- What benefit (if any) does the tenant get for paying a reduced rent rather than paying no rent?
- Will the landlord receive rent compensation from the Government and are they required to pass this onto the tenants whether a tenant is paying no rent, a reduced rent or full rent?
- If the tenant’s business is impacted significantly and has no cash flow how is the landlord to be compensated?
What should a Tenant do now?
If you are a tenant experiencing financial distress then what should you do now? Even if the Government has not released its detailed guidance you should contact your landlord straight away to discuss the situation. The discussion with the landlord will depend on the financial impact your business is experiencing and the lease terms. It is likely termination would only be a remedy in extraordinary circumstances such as if a business has gone into liquidation.
Summarised below are four common scenarios with a recommended approach.
1. A lease with years before expiry
Determine the financial impact of the coronavirus on your business:
- If you need rent relief/reduction then speak with your landlord to determine the amount and period. Depending on your level of financial distress then a full rent reduction or partial rent reduction may be negotiated. As the impact on the economy is unknown as this time it is recommended that the rent change apply for the full 6 month period.
- If you need to terminate due to extraordinary circumstances your lease then speak with your landlord. Be prepared that you may need to compensate the landlord for their loss eg. surrender of the bank guarantee, the fitout within the premises or pay the value of the make good. The value of the compensation will depend on the Government’s detailed guidance.
2. A lease that will expire within the next 12 months
For the period of the lease remaining, determine the financial impact of the coronavirus on your business:
- If you need rent relief/reduction then speak with your landlord to determine the amount and period (as in Scenario 1).
- If you need to terminate your lease then speak with your landlord immediately (as in Scenario 1).
If you have requested rent relief/reduction the landlord will be eager to understand your intentions post the lease expiry. However it is recommended that you agree a holdover for a short term period with the landlord post lease expiry awaiting the economy to recover. A longer lease commitment can then be agreed once you understand the future cash flow of your business.
3. A lease has expired and now in hold over (eg month to month) or a short term lease (eg at a co-working space)
Given that you have only one month’s notice to terminate your lease you may decide to continue and terminate when the business requires. Be aware that if your business is not ready to work remotely then you must take action to be prepared.
If you do need a premises to work from and also need rent relief/reduction then speak with your landlord to determine the amount and period (as in Scenario 1).
4. Currently negotiating or intending to sign a lease or awaiting relocation to a new premises
Determine the financial impact of the coronavirus on your business.
- If your business is impacted financially then do not sign the lease until you discuss these issues with the new landlord. It may be the case that you can proceed provided that the new landlord provides rent relief for the first 6 months of the lease. Keep in mind that if you do not sign the new lease and are within an existing premises then you will need to speak with your current landlord.
- If your business is not impacted financially by the coronavirus then proceed however include special clauses within the lease that enable a rent relief or lease termination based on if financial distress occurs in the future.
In circumstances where you have committed to a lease at a new premises that is being fitted out/ built then:
- If the building work has stopped and your business has been impacted financially then you should speak with your current landlord regarding your hold over.
- If the premises is ready you may not be able to relocate. Therefore if your business has been impacted financially you should negotiate with the new landlord for rent relief and the current landlord regarding your hold over or termination.
Keep in mind that a hold over at your current premises has minimal financial impact on the landlord as there is limited loss being incurred.
Tenants with large portfolios
For tenants with large portfolios taking action is essential and requires a strategic approach. Prioritise via the following:
- Leases in hold over;
- Leases shortly to expire; and
- Leases with longer terms to expiry.
Within each of these groups priority should be given to the leases that have the highest rent and potential ease of securing occupancy cost savings with the landlord.
Currently, Property Beyond is negotiating with landlords on behalf of its tenant clients in Australia and New Zealand to achieve rent reductions. There is a level of complexity with each negotiation as each tenant’s financial impact is different and the loss experienced by each landlord varies.
Please call us if you would like assistance to:
- Determine how best to approach your landlord(s); or
- Negotiate with your landlord(s).
The Prime Minister’s Announcement
On 29 March 2020 the Prime Minster released a Media Statement stating that “National Cabinet agreed to a moratorium on evictions over the next six months for commercial and residential tenancies in financial distress who are unable to meet their commitments due to the impact of coronavirus.”
There is little guidance to the detail of this moratorium however the following guiding principles were outlined:
- “A short term, temporary moratorium on eviction for non-payment of rent to be applied across commercial tenancies impacted by severe rental distress due to coronavirus;
- Tenants and landlords are encouraged to agree on rent relief or temporary amendments to the lease;
- The reduction or waiver of rental payment for a defined period for impacted tenants;
- The ability for tenants to terminate leases and/or seek mediation or conciliation on the grounds of financial distress;
- Commercial property owners should ensure that any benefits received in respect of their properties should also benefit their tenants in proportion to the economic impact caused by coronavirus;
- Landlords and tenants not significantly affected by coronavirus are expected to honour their lease and rental agreements, with Commonwealth, state and territory governments, local government and financial institutions to consider mechanisms to provide assistance.”