Commercial Leasing COVID Code deficiency

9 Apr 2020

Written by

David Busoli, Principal

The Government’s Code is seriously deficient as it seeks to deal with a three point problem by addressing only two of them. The government acknowledges that the question of rental relief needs to be addressed via consultation between the tenant, landlord and the landlord’s banker but the Code only materially addresses the first two. This places the landlord in a difficult position if their bankers do not cooperate.

Essentially the Code gives a tenant, with a reduction in turnover of at least 30%, a rental accommodation for the COVID period of at least that amount. The concession is based on the tenant’s reduction in turnover, not their ability to pay. In contrast, the landlord must make the accommodation without reference to their ability to withstand the income deficiency (though there are some negotiable points at the margins that take the landlord’s financial capacity into account). The Government’s expectation is that the landlord’s bankers will assist – but this is by no means guaranteed – creating a very real possibility that the landlord will be affected far worse than the tenant.

This example comes from the Code;

Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis

ie. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.

At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.

Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties

So if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.

Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.

The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.

You will have noticed that there is no mention of the landlord’s financial ability to fund this.

Last week I asked readers to let me know of any bank concessions to property owners that they’ve seen to date. Data is still thin on the ground but, as expected, such concessions vary widely. I have had reports of 3 to 6 month interest capitalisation but also outright refusals. Sometimes the refusal has been on the basis that any accommodation would be against the law, including the SIS Act. This is clearly nonsense. I would certainly appreciate receiving any feedback you may have on the attitudes of various banks in this regard.

The government has been tackling this national emergency with imagination, courage and resolve. Their actions have been commendable to date. It is for this reason that I am hopeful that another announcement will be forthcoming to rectify the problems that this particular “solution” has created.

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