LEASES – COVID-19 IMPACT
As the Coronavirus (COVID-19) continues to spread across Australia its impact on commercial arrangements is a serious concern for landlords and tenants alike. The mandatory closure of licensed premises and various quarantining measures have resulted in landlords and tenants discovering that their commercial and retail lease agreements do not deal with unprecedented events like COVID-19.
Force majeure clauses in leases are rare to find and rent abatement clauses are generally only applicable in the context of substantial physical damage or destruction to premises. The various retail leases legislation across the states do not generally assist in the context of unprecedent circumstances dealing instead with more usual things like pre-lease disclosure, a right to a particular length of term and some restrictions on the content of agreements.
Under most lease agreements tenants are generally not entitled to rent relief or to reduce trading hours and landlords are generally not entitled to restrict exclusive possession by shutting down access to premises meaning parties have looked to federal and state governments for assistance.
The state government assistance announced so far to deal with the effect of COVID-19 on small business has related generally to payroll tax relief, waiving or deferral of some government charges and support by way of interest free loans. The particulars of the financial support depend upon which state the business is located and the details of the support arrangements have largely not yet been provided. Victoria has announced a limited deferral of payment of land tax and Western Australia announced that new payment arrangements for deferral of land tax will be interest free.
The federal government assistance announced includes grants for some businesses that have employees (with the size of the grant being based on tax withheld on employees’ wages), expansion of the instant asset write-off scheme and accelerating depreciation deductions for new assets purchased by eligible businesses. The federal government committed to guarantee 50% of new short-term unsecured loans to small and medium businesses and the Australian Banking Association announced that banks are willing to pause repayments for small business loans for six months. The federal government has also raised the threshold for creditors to issue a statutory demand on a company from $2,000 to $20,000 for a period of six months.
With many business interruption insurance policies having an exclusion for disruption arising from highly effective diseases such as COVID-19, governments not as yet announcing any specific rent assistance for commercial and retail tenants and lease agreements not providing any help, tenants are now asking their landlords for rent relief.
It would seem some landlords are willing to negotiate an equitable outcome for both parties as procuring a new tenant in the current environment will be very difficult for a landlord and a commencement rent would be very low with large incentives likely being required and would be conditional upon the trading restrictions being lifted.
Other landlords are seeking to rely on obligations in the lease and are reluctant to enter into any kind of rent abatement or deferral arrangement. This kind of approach is likely to result in tenants opting to walk away from their lease agreements leaving tenants and guarantors exposed and landlords left holding vacant premises with no rental income and outgoings to pay for the foreseeable future while they chase impecunious tenants and guarantors.
With their businesses impacted many tenants have lost the cash flow needed to make regular rent and outgoings payments.
We have discussed various options for rent relief with our clients including:
- rent abatement for a fixed period or rent abatement until a defined event occurs such as the end of the mandatory premises closures due to COVID-19;
- deferred rent arrangements with the balance payable over the remainder of the term following a period;
- change to turnover rent for a period;
- abatement and deferral arrangements linked to varied lease terms such as future premium payments, early exercise of option terms, more landlord friendly future rent review provisions, increased tenant refurbishment or decoration obligations or increased future flexibility for landlords such as inclusion of relocation provisions.
In negotiation of any deferral or abatement arrangement the parties need also consider matters such as:
- The potential that the mandatory closures and trading restrictions might not last for as long as is currently anticipated or might last even longer than anticipated.
- What is the nature of the tenant’s business and are there currently any restrictions imposed, i.e. licensed premises?
- Will outgoings payments also be deferred? Is the lease net or gross rent?
- Is any retail lease legislation applicable to the lease? There can be restrictions on things such as premium payments, rent reviews and inclusion of new lease terms such as relocation or development provisions.
- Has the landlord considered the tax consequences of an abatement versus a deferral?
- Would the arrangement be taken into consideration in a future rent review?
- Is there a market review approaching and is there an enforceable ratchet clause in the lease?
- Would the arrangement be confidential in the context of a landlord with multiple tenants?
- Is the tenant solvent at the time the arrangement is being made?
- How do the default provisions in the lease interact with arrangement being made?
- Converting to turnover rent in the context of a licensed premises could be considered profit sharing and might require approval from the licensing authority and appropriate thresholds and percentages might be impossible to determine in the context of a lease with no reference to turnover rent.
Ryan & Durey Solicitors is here to help. If you would like further information regarding the public interest test requirement, please contact Jarrod Ryan (firstname.lastname@example.org), Adrian Battiston (adrian@ryandurey), Ben Edwards (email@example.com) or Alyce Cassettai (firstname.lastname@example.org)