COVID-19 – key considerations for landlords

1 April 2020

Publications

Many of you are likely receiving regular updates on the impact of COVID-19 on your properties, given that the Australian Government has implemented further restrictions on public gatherings.

The events over the past week have significantly impacted businesses by either restricting trading or forcing a complete shutdown.

We are awaiting the release of regulations from each State as to how any restrictions on a landlord’s right to terminate a lease and recover arrears from tenants will apply.

In the absence of clear direction from the Government, the following points should be given careful consideration before entering into any rent deferral arrangements with tenants. Please note: the information contained below is current as at 1 April 2020.

1. Careful and consistent communication

Landlords need to be careful about what they are communicating to tenants.

The temptation is to verbally offer some kind of concession which, without more, could produce all kinds of disputes once businesses resume normal trade.

2. New or current negotiations

Is your proposed tenant a foreign investor/has foreign ownership?

The rules in relation to foreign investment have changed.

While a commercial lease or retail lease to a foreign person with a term (including options) longer than 5 years has always had the potential to be a foreign investment requiring approval, as a matter of practice most leases did not reach the notification thresholds. With the temporary abolition of all monetary thresholds, all leases to foreign entities which exceed 5 years (including options) will require FIRB approval, unless new regulations provide an exemption. There are possible delays in FIRB approvals for up to 6 months.

Follow our discussion on the FIRB changes here.

3. What types of concession will be provided?

If a concession is to be offered, then the type of concession needs to be considered, as outlined in the table below.

Concession Description Considerations
Rent reduction For a specified period Amount
What amount is adequate, in the circumstances, having regard to the nature and extent of any shutdown and the type of business activity conducted by the tenant?
Timing
When will any concession start and end?  Will it apply only when the premises is forced to stay closed or when a tenant elects to close?Variations
Will any further variations be required to the lease, for example, if the term is extended commensurately with the time of any forced shutdown for any retail lease, could this generate the need to issue a new disclosure statement to the tenant?
Variable vs Statutory Outgoings
In the absence of clear direction from the Federal or State Governments, is the Landlord prepared to abate all outgoings or only those that relate to occupation of the premises (e.g. the proportion of rates and taxes).
Rent deferral For a specified period
Rent deferral plus variation If the rent is deferred for a certain shutdown period, will the lease be automatically extended for the same period?
Outgoings reduction Will outgoings abate during any shutdown period?

Incentives granted to the tenant should be considered in this context so as not to waive any rights for repayment or otherwise.  If incentives have been granted by way of rent abatements, is it appropriate to bring them forward for a specified period and readjust the abatements over the balance of the term?

4. Eligible tenants

We recommend that landlords:

  • agree clear criteria to determine which tenants will be eligible for deferment of rent; and
  • implement a consistent, transparent framework for rent assistance.

    For example, tenants can complete an application form for the landlord to consider any requests for financial assistance on a case-by-case, which could request the following information:

    Tenant’s business
    Details as to how the tenant’s business is affected by the COVID-19 outbreak.

    Arrears
    Details as to whether the tenant is currently in arrears of rent or other monies payable under the lease.

    Mitigating factors
    Whether the tenant has attempted to mitigate the impact of COVID-19 on its business e.g.

    • confirm if the tenant has applied for or received any Government assistance; and
    • has the tenant claimed or is able to claim any insurance under their current policy (e.g. business interruption loss).

    Financial information
    Tenant to provide financial statements for the past two financial years and monthly turnover figures (e.g. for online sales if they can continue to sell goods online during any shutdown period.

    5. Documentation

    It is critical that any rental assistance arrangement or concession agreement is set out in a deed to formally vary the terms of the relevant lease.

    6. Financier assistance/approval required

    We recommend that landlords engage with their financiers as soon as possible to discuss possible rent deferral arrangements and review their current financing documents.

    Whilst the Government has indicated that it may pass legislation to support the Government’s ‘hibernation’ plan for businesses, there is no certainty as to whether any concession provided by a landlord will also apply to the landlord’s financier.

    Landlords must be careful not to inadvertently breach the provisions of their mortgage or finance arrangements.  Any variation of lease or ‘rent concession deed’ may require mortgagee’s consent.  If the relevant bank does not approve the proposed concession – there is a possibility that it cannot be passed on to the relevant tenant.

    Next steps

    We understand that this is a difficult time for all businesses.

    Any communications given out to tenants in advance of setting out clear criteria for rent assistance and preparation of deeds needs to be carefully worded to ensure no adverse impact to a landlord, including the waiver of rights and/or the creation of express or implied representations/warranties.

    Please contact a member of our national property team if you would like to discuss further or would like any assistance in preparing or reviewing preliminary correspondence to your tenants.