Finally, we have some clarity for landlords negotiating this new Corona virus world. This is an explanation of the mandatory Commercial Tenancies Code. Landlords and tenants will be sharing the pain. For a landlord, claiming every tax deduction will be critical – and that includes depreciation.
Read more in the following article by Sian Sinclair of Grant Thornton.
After continued jostling with industry groups over the weekend, Prime Minister Scott Morrison today revealed the final details of the mandatory Commercial Tenancies Code for commercial and retail leases. This is generally in line with the update the Prime Minister gave last Friday.
The intention of the Code is to preserve the commercial leases in place and leave both the tenant and the landlord in a position to pick things up again once the period of hibernation is over.
Now agreed upon, the Code will be legislated and managed by the States and Territories and will be subject to binding mediation. The two core principles underpinning the Code will be good faith and proportionality, with landlords and tenants urged to work together on how to best manage rent relief going forward.
- Who does the mandatory code apply to?
The code will apply to tenants with a turnover of $50m or less.
- Tenants that have experienced a 30% or greater loss in revenue.
- Tenancies where the tenant is participating or will participate in the JobKeeper program.
- What does rent relief look like?
Landlords are expected to negotiate in good faith and ‘share the pain’.
- The rent relief should be proportionate to the reduction in turnover and should comprise waivers and deferrals.
- Waivers must account for at least 50% of the reduction.
- Any recoupment of deferred rent will be over the duration of the lease period or a minimum of 24 months. This means if a tenant has six months left on their lease, they should be offered a 24 month period to pay any deferred rent.
- Landlords cannot terminate a lease on the basis of non-payment, nor dip into bonds to cover unpaid rent. Those who choose not to engage may forfeit themselves out of the lease.
- Tenants are expected to honour their obligations under a lease (i.e. they can’t just walk away, which was one of the industry concerns when the initial guidelines were announced).
While the eligibility for JobKeeper is currently uncertain, those with rental arrangements that fall outside of the Code (generally turnover above $50m or less than 30% reduction in turnover) will need to negotiate with their landlords without the protection of the Commercial Tenancies Code. Interestingly, many landlords could find themselves offering significantly different lease concessions on a lease by lease basis, depending on which of their tenants are eligible for JobKeeper. A one size fits all approach does not apply, hence the message to negotiate in good faith.
We anticipate there will be additional information to come from the States and Territories about how this will be applied in each jurisdiction, as well as announcements of additional relief on land tax and rates – on the proviso this is passed on to the tenants.
The Prime Minister stressed that the banks will be key to making this work, and urged international banks operating in Australia to provide the same level of support as the national banks have to date. How the support of the banks can be formalised remains to be seen, particularly where international funding is involved. Mortgage payment deferrals are a cash flow inconvenience for banks and currently, these are only for facilities below $10m, so we would like to see some real support in the form of interest waivers or suspensions during any “rent-free periods” required under the Code. There isn’t a sharing of the pain unless the banks are forgoing some income – as with all other parties involved.
The Prime Minister confirmed that residential rent relief will be considered and implemented by each State and Territory and not by the National Cabinet.