Renegotiating your lease: what you need to know
There’s a lot of information out there about the National Cabinet’s new Commercial Leasing Code of Conduct. So much, in fact, that it can be difficult to understand what it actually means for your lease.
In this article, we’ve unpacked some of the key points of the new Code into a short summary, to help you understand what it actually means for your Commercial Lease.
Negotiate!
Before we get in to the specifics, it’s important to note a key takeaway from the Code: every lease is different, and landlords and tenants should negotiate tailored, bespoke lease variations that suit their particular circumstances.
With that in mind, let’s unpack some of the specifics under the Code.
Moratorium on evictions
Under the Code, Landlords cannot evict Tenants for not paying rent or closing their doors due to the COVID-19 pandemic.
This doesn’t mean that Tenants have free rein to do whatever they want, though. The Code makes it clear that other than paying rent or keeping the doors open (both of which a tenant ordinarily must to do under most leases), Tenants must comply with the terms of their lease, or risk losing the protection offered by the Code.
The snapshot: Tenants need to comply with the terms of their lease, subject to any reductions in rent afforded under the Code. Tenants cannot be evicted or penalised for closing their doors during the pandemic.
Rent relief
The Code requires that Landlords and Tenants negotiate rent relief of up to 100%.
The amount of rent relief needs to be proportionate to the Tenant’s reduction in turnover.
This means that if a Tenant’s turnover has dropped by 75% as a result of the pandemic, rent should be reduced by 75%, for example.
Rent waivers and deferrals
Under the Code, the total rent relief that is offered should be in the form of waivers and deferrals.
Waivers are a full discount on rent that the Landlord can’t recover in the future.
Deferrals mean that rent is not payable now, but can be recovered by the Landlord at some later date provided it is at least 24 months after the pandemic ends.
By default, at least 50% of the total rent relief must be in the form of waivers.
For example:
A Tenant has suffered a reduction in rent of 80% as a result of the pandemic. Under the Code, the Landlord is expected to provide rent relief of 80%. At least 40% or rent should be waived. The rest can be deferred or the parties can get creative with other forms of rent relief.
No penalties
Any deferral or waiver of rent must not attract penalties.
This means that a Landlord cannot charge a Tenant interest or fees on deferred rent, for example.
Landlords must pass-on benefits
The Code provides that Landlords should pass on any benefits they receive, such as loan repayment deferrals, or subsidised or discounted rates, charges and taxes such as land tax.
Securing the security deposit
Under the Code, Landlords are prohibited from drawing on a Tenant’s security deposit to cover unpaid rent.
Rental increases prohibited
In general, Landlords cannot increase rent during the pandemic - unless rent reviews are turnover-based.
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Frequently asked questions and tips and tricks
At District Consulting, we’ve been working with Commercial Landlords, Tenants and Agents to renegotiate commercial leases in accordance with the Code.
We’ve had some really good questions from clients about the operation of the Code and are working with clients to maximise value for all parties when renegotiating leases under the Code.
Some of the questions we’ve had regularly come up are addressed below.
Question: Does the tenant have to prove that it has suffered a reduction in revenue?
Short answer: Yes.
Long answer: The Code provides that landlords and tenants have to work together in good faith and provide sufficient and accurate information to inform their negotiations under the Code.
What this looks like will depend on the circumstances. One option that we’ve seen work is a letter from the tenant’s accountant certifying the reduction in turnover. This seems to balance the burden of providing financial records, with the need to provide accurate and reliable information. Remember, any error or misleading information in that document can result in the accountant being liable.
What about Landlords: do they have to provide details of the benefits they receive, given the Code says they need to pass them on to the Tenant?
Short answer: Yes.
Long answer: the requirement to provide sufficient and accurate information and negotiate in good faith applies equally to landlords and tenants. This means that landlords need to provide details of any benefits they are receiving that can (and under the Code, should) be passed on to a Tenant. Again, we have worked with landlords’ accountants to provide a summary letter which certifies these details for the parties, which works well in some cases.
How do we formalise the lease variations?
Short answer: get a lawyer to draft a Deed of Variation
Long answer: Any variation to a lease (or any other legally binding document) should be recorded in writing. For commercial leases, this is typically done with what’s called a ‘Deed of Variation’. A Deed of Variation formally varies certain terms of a lease, without changing others.
It’s important to use a lawyer for a number of reasons, but in particular it’s about risk - for the landlord, tenant, and agent.
It’s critical that the Deed is drafted by an expert so that the Lease remains on foot and as varied, reflects what the parties have actually agreed - without accidentally changing other aspects of the lease which might make it difficult to understand or worse, unenforceable.
Another critical reason for using a lawyer is perhaps best demonstrated by an example.
Example: why it’s important to use a lawyer
Say a tenant has suffered a reduction in turnover of 90% since the pandemic hit. The landlord agrees to rent relief of 90% of the $6,000 monthly rent, and the Deed of Variation reflects this. The Deed formally records a fixed 45% rent waiver for the remainder of the pandemic, and 45% deferral.
Meanwhile, the tenant is exploring new revenue streams and actually improves its business position. The next month, its reduction in revenue is only 30%. But the Deed of Variation has been drafted to record a fixed 90% rent relief provision.
If the Deed of Variation had been drafted by a lawyer with expertise in Commercial Leases and the new Code of Conduct, it might have had a turnover-based rent relief clause, or monthly rent reviews subject to turnover.
With the help of a lawyer drafting the Deed of Variation, the landlord could have earned 30% more rent, or $1,800 more every month, but only if and when the tenant’s business conditions improved and they could afford it.
To us, that’s a win-win.
Next steps
If you’re a leasing agent, landlord or commercial tenant and need help varying your commercial lease or understanding the new Code of Conduct, get in touch with us at District Consulting for an obligation-free chat.
We’re offering fixed, transparent pricing including reduced rates for businesses impacted by COVID-19.
Disclaimer
The information presented in this article is general in nature and intended for readers in Victoria, Australia and is current at the date of publication. COVID-19 is an evolving situation. This information does not take into account your personal or business circumstances. Always seek specific, tailored professional advice to determine whether this information is appropriate for your circumstances.