If you’re confused about the changes to commercial rent guidelines, you’re not alone. With the Federal Government forced to create policy on the run to stem the tide of a full-blown economic crisis, things have been changing very quickly and there has been some confusion.
Here are some of the main questions we’ve been hearing from businesses on commercial rent throughout COVID-19 and our answers.
What is the six-month moratorium on evictions?
Earlier in the year, in an effort to keep businesses in “hibernation” for six months rather than closing permanently, the Federal Government announced there would be a six-month moratorium on evicting commercial tenants who can’t afford their rent.
While there was initially some confusion over how this would work in practice, the Federal Government has since announced a mandatory commercial tenancies code to guide negotiations – not just around evictions but also around rental relief.
What rental relief is available to businesses?
Rental relief measures will be legislated and regulated in each State and Territory, but the overarching goal of the mandatory commercial tenancies code is for rental negotiations throughout this crisis to be undertaken in good faith. That means that businesses experiencing economic hardship will get rental relief, while those which are not impacted will be unable to seek an opportunistic rental reduction.
Businesses can negotiate for a reduction in rent or a deferral of payment, if they have turnover under $50 million, are eligible for JobKeeper and have experienced a 30% drop in revenue or more as a result of coronavirus.
Rent reductions must be proportional to the business’ revenue reduction and be achieved through waivers (up to 50%) and deferrals for up to 24 months. Businesses will need to provide proof to landlords to receive a reduction.
What if my business isn’t eligible under the code?
If your business doesn’t meet the requirements of the code but you are struggling to afford your rent, you will need to negotiate with your landlord. If you are close to the end of your lease you will be in a stronger bargaining position. Many landlords will be open to negotiate given they will find it difficult to locate an alternative tenant should you move on.
Approach your landlord in good faith and share proof of your financial situation. You may find it easier to negotiate a deferral rather than a reduction. Make sure any agreements made with your landlord are formalised in writing.
Will I still owe rent if my business closes?
If a business closes, the commercial lease remains valid. The business is still obliged to pay rent until the end of the lease term unless the lease has provisions for an early exit. For those that had negotiated a reduction, they will also owe any deferred rent.
Businesses may be able to negotiate with their landlord to surrender their lease, which is when both parties mutually agree to end the lease, if the landlord is open to it.
What happens once businesses need to pay back rent?
The code seemingly relies on the assumption that businesses currently experiencing economic hardship will bounce back and be in a position to repay any deferred rent within 24 months. While we can remain hopeful this may eventuate, it is probably more likely that the economy won’t return to pre COVID-19 conditions in that time.
Many businesses may cease operations while still owing the remainder of the rent for the lease term as well as deferred rent, with landlords unwilling to negotiate the surrender of the lease for fear of not being able to locate another tenant.
This could be a disastrous scenario for many businesses if it eventuates. What we may see is that the government will need to intervene once again to prevent another crisis emerging. It depends on how quickly the economy can be revived.
Will businesses choose not to rent office space in future?
We may see businesses which don’t require customer-facing premises, opt to not rent office space altogether. What the pandemic has revealed is that business can be undertaken from home quite successfully, so we may see a shift towards more businesses operating remotely. Some retail businesses may opt to shift to online only to keep costs down and take advantage of the surge in online shopping.
Rolf Howard is Managing Partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses.