Agreed leasing principles during COVID-19: A guiding framework for landlords and tenants.

The COVID-19 coronavirus continues to wreak havoc on every aspect of our lives, and it seems retail is the most visual indicator of that. This past week has seen shopping centres allowed to remain open but food courts forced to close, all restaurants and café’s closed but able to sell take-away or delivered food, and businesses classified as ‘non-essential’ continue to trade as long as social distancing regulations are adhered to.

The strongest advice from the Government has been to self-isolate as though you have the virus which has led to #stayathome becoming the catchphrase of efforts to ‘flatten the curve’.

A population staying at home though, is not good for retail. While many have been waiting, almost pleading with the Government to issue a complete lockdown order allowing retail stores to close until further notice, that direction hasn’t come (as at the time of writing this article). Wanting to ensure the safety of their employees and customers, combined with trading figures being as much as eighty percent below the already struggling retail figures for some businesses, many retailers have chosen to ‘voluntarily’ close their doors for at least the next four weeks and with the expectation that this situation could see them closed for three to six months.

The question every retail lessee is asking

Across Australia, across every category of retail, single store businesses and retail brands with huge portfolios of eighty stores and more, are all asking the same questions:

  1. Can I get my rent reduced until things return to normal?
  2. Will the landlord terminate my lease if I can’t pay rent?

With landlords already inundated with requests for rent relief from their tenants, most have been responding with empathy but waiting to see if the government will introduce any initiatives or support to assist landlords financially which would then allow them to pass on rent reductions to tenants.

Both sides of the negotiating table have much to lose, especially if the current restrictions continue for the predicted three months. If that period is extended to six months, there would be serious financial consequences for both sides. So far its been each side looking after their own interests and the long-standing power imbalance between landlords and tenants has been evident in the current crisis also.

With so many retailers requiring landlord support to survive the current crisis, the Prime Minister announced on Sunday, March 29th, a “common set of principles” formulated by the National Cabinet from advice and feedback from a variety of industry experts and the peak retail bodies.

The ‘common set of principles’ outlined by the prime Minister consisted of 7 key talking points and this week, the peak retail bodies – The National Retail Association (NRA), The Australian Retail Association (ARA), The Pharmacy Guild PGA), and the Shopping Centre Council of Australia (SCCA), have established a set of “Agreed Joint Principles”. for the states and territories to implement as they see fit.

The 7 Agreed Joint Retail Leasing Principles

Below are the seven principles put forward by the National Cabinet and the responses by the signatories to the ‘agreed joint principles’.

A short term, temporary moratorium on eviction for non-payment of rent to be applied across commercial tenancies impacted by severe rental distress due to coronavirus.

  • The SCCA has already agreed to non-termination for non-payment of rent for SMEs.

Tenants and landlords are encouraged to agree on rent relief or temporary amendments to leases.

  • Tenants and landlords are encouraged to agree on temporary rent assistance.
  • This would need to be considered on a case-by-case basis.
  • Tenants would need to provide relevant financial data and other business information to heighten the lessor’s understanding of the retailer’s capacity to pay during the affected period.

The reduction or waiver of rental payment for a defined period for impacted tenants.

  • Rent assistance (including in the form of rent deferral) would be for a defined period, with a focus on non-essential SME tenants, on case-by-case basis, facing financial hardship as a result of COVID19.
  • Tenants would need to provide relevant financial data and other business information to heighten the lessor’s understanding of the retailer’s capacity to pay during the affected period.
  • Financial assistance could be based on the overall financial capacity of the retailer

The ability for tenants to terminate leases and/or seek mediation or conciliation on the grounds of financial distress.

  • Termination as proposed is not supported, and we believe should not be progressed.
  • Principles 2 and 3 are considered more balanced and important for landlords and tenants to continue working together.
  • We support tenants being able to seek mediation from Small Business Commissioners on the grounds of financial stress as a result of COVID-19, with appropriate processes put in place, and to work together in good faith to reach a commercial outcome which ensures retailers resume trade and become financially viable within a defined recovery period.
  • A unilateral termination right isn’t balanced, given a landlord’s inability to terminate for non-payment of rent, and is not linked to the obligation on both the lessor and the lessee to work together during the recovery period.
  • While other principles apply to the short-term, this principle allows an entire lease, which may run for years beyond COVID-19, to be terminated. This does not encourage retailers to work with landlords and financial institutions to formulate a recovery plan.
  • It is unclear what “financial distress” specifically applies to, and what financial hurdles would apply before a retailer could exercise this right.

Commercial property owners should ensure any benefits received in respect of their properties should also benefit their tenants in proportion to the economic impact caused by COVID-19.

  • We believe governments should reduce statutory charges such as land tax and council rates, which will be passed on to give relief to tenants during this period.

Landlords and tenants not significantly affected by coronavirus are expected to honour their lease and rental agreements.

  • Agreed, as per the terms of lease agreements. All parties should comply with existing leases, subject to the principles above.

Cost-sharing or deferral of losses between landlords and tenants, with Commonwealth, state and territory governments, local government and financial institutions to consider mechanisms to provide assistance.

  • It is unclear to the parties what this means; however, we have advocated for and would support government assistance in relation to rent relief.
What does it mean?

These principles have been put in place due to the urgency and unique nature of the COVID-19 crisis. It is designed to be a framework for the National Cabinet and individual states and territories to develop further and implement as a ‘code of conduct’ nationally, or via amendments to the legislation relevant to each state and territory.

In the short term, it’s a guide as to how landlords and tenants should work together for the good of both parties and abide by a few overarching principles including:

  • Mutual interest in business continuity
  • Landlords to encourage tenants to discuss relevant issues with them
  • Both parties to work towards agreed outcomes
  • Case by case basis
  • Tenant may need to provide accurate business records to landlords to assess impact
  • Leases remain legally binding

The most important thing to remember is that we are all in this together and no-one will benefit if businesses are not able to re-open once current restrictions can be lifted.

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