For businesses impacted by COVID-19, auditing all business expenses is imperative to not only survive the uncertain times, but more importantly make it through to the other side.
Rent for commercial businesses normally accounts for the second biggest business expense behind employee salaries. Often small businesses rely on their monthly revenue to make their rental payments and whilst demand has decreased for many industries it may be possible to negotiate your rent bringing some relief to your business.
The government recognises the significant impact of this outgoing business expense and announced a moratorium to assist commercial and residential tenancies who are unable to meet their commitments due to the impact of COVID-19 – following this announcement, a mandatory code of conduct for commercial tenancies, to be legislated by state and territory was also announced.
This Federal announcement comprised of two key elements: a six-month moratorium on rental evictions for tenants in financial stress due to COVID-19 and a mandatory code of conduct for landlords and operators that outlines the way they must treat eligible SME tenants.
So what does this mean in simple terms?
Landlords are legally bound to negotiate with their financially distressed commercial tenants a reduced rent in the form of a waiver and deferred rent.
The new code for commercial tenancies, aims to ensure small to medium business tenants can emerge at the other side of the coronavirus crisis still in their premises, helping the economy to bounce back after the state of emergency has ended.
It only applies to landlords and tenants who have applied for the JobKeeper payment and who have a turnover of $50 million or less.
As part of the code, landlords will be expected to offer a reduction in rent that is proportionate to the tenant’s decline in turnover as a result of COVID-19. The amount reduced will need to be negotiated through an approved mediation process.
Landlords will also need to allow for their eligible tenants to defer rental payments. These deferrals can be expected to be covered over the life of the lease and must be no less than 24 months.
There are additional prohibitions that the code places on both landlord and tenant, including (but not exclusively):
- Penalties for tenants who reduce operating hours or stop trading
- On passing land tax on to tenants
- On charging interest on unpaid rent
- Rent Increases – There will be 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
- No eviction – Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period)
Good-Faith, Cash flow and Communication
The Prime Minister said that the proposed code of conduct “brings together a set of good-faith leasing principles”, and he handed the responsibility of legislating and implementing this mandatory code of conduct on to the various state governments across Australia.
In addition to the Federal Government’s eviction moratorium and mandatory code of conduct, the various state governments have also announced their own rent relief packages – pledging millions of dollars’ worth of rental assistance across residential and commercial tenancies.
A big part of the Federal Government’s mandatory code of conduct comes down to the negotiation between the tenant and landlord so act early, protect your cash flow and nurture your relationships.
To find more information and links to additional State and Territory announcements head to the Australian Government Website.