COVID-19 – key considerations for tenants

1 April 2020

Publications

Many of you are likely receiving regular updates on the impact of COVID-19 on your tenancy, 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 rental assistance for 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 or outgoings deferral arrangements with landlords. Please note: the information contained below is current as at 1 April 2020.

1. Open communication

The Government’s recommendation to tenants is to negotiate directly with their landlord and/or financier if they are experiencing financial difficulties. Tenants will need to be open with their landlord in any request for concessions and provide details of their financial position.

2. What type of tenant are you?

The Government is taking different approaches to different types of tenants. Are you a residential tenant, a commercial tenant or a retail tenant? Peak industry bodies such as the Australian Retailers Association and the National Retail Association (in the case of retailers) are advocating on your behalf and may broker overarching arrangements with institutional landlords, which may affect your rights and depart from the recommendations of the Government.

3. New or current negotiations

Are you a foreign investor or do you have 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.

4. Government assistance available

Tenants may be eligible to receive economic assistance from the Government including business support with one off grants that can be used towards costs such as utilities, rent and salaries.

Tenants should keep in mind that their landlord will likely take into account any Government assistance provided to them in any request for concessions.

Tenants not significantly affected by COVID-19 are expected to honour their lease and rental arrangements.

5. What types of concession could be requested?

If a concession is to be requested, 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? This must be balanced with the landlord’s position including its obligations to meet Bank covenants.
Timing
When will any concession start and end?  Will it apply from 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 problems for tenants being locked into longer leases in an unstable economic climate?
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). Is it appropriate for some outgoings to still be provided if a particular service is no longer being provided? Are outgoings higher because of extra cleaning and security measures? Tenants should query where their landlord receives any government concessions to pass on any cost sharing or concession in relation to outgoings to the tenant.
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.  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?

6. Moratorium

In the event tenants are unable to meet their obligations under the lease in relation to payment of rent, a short term, temporary moratorium on eviction for non-payment of rent has been applied across the States for commercial tenancies impacted by severe rental distress due to COVID-19.

7. Information to provide landlords

Tenants should expect to be asked a multitude of questions in relation to their business, their financial position, their employees and provide information to their landlord openly (even if ordinarily not required by law). Examples for information that a tenant may be asked to provide are:

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

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
A request for provision of financial statements for the past two financial years would not be unreasonable, and monthly turnover figures (e.g. for online sales if you can continue to sell goods online during any shutdown period).

8. 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.

9. Financier and insurance assistance

We recommend that tenants as business owners and operators engage with their financiers and insurers as soon as possible to review their current financing documents and insurance policies and see if any further financial assistance can be provided.

Next steps

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

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 from your landlord.