Where to Next? COVID-19 and Its Effect on Commercial Leasing and Employment Law

Dec 02, 2020 • JOHN WALTON

SaucedIt and top rated employment lawyer, Timothy Horne (Horne Legal) explain how to navigate through the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (COVID-19 Leasing Regulation) and the National Cabinet Mandatory Code of Conduct (Code[1] ).

The first episode of SaucedIt’s ‘Hiring and Firing’ podcast has just been released, in which John Walton (Founder and Director of SaucedIt), Derek Rielly (?)[2] and Timothy Horne (legal brain behind SaucedIt) discuss how businesses and landlords respectively, can navigate this turbulent time.

For all Australian businesses, this period has not been without its difficulties, one of which being the constant dynamism of legislation, regulations and rules posed by the government. With two in three businesses (over all sectors) reportedly [3] experiencing a significant impact on revenue and cash flow as a result of the pandemic, it is no surprise that commercial leasing has been a hotly debated and confused subject for many.

So what should a business know if they cannot pay their rent?

Tim explains that the National Code of Conduct for Commercial Tenancies is currently providing protection for lessees during Covid, allowing tenants to ask their landlord for a rental waiver and deferral. This waiver will not include the entire sum of the rent, however if the lessee is considered ‘impacted’ (i.e. 30% drop in revenue - essentially, whether the business is eligible for jobkeeper), they can receive a minimum of 50% of their rent waived, and a proportionate amount of the remaining rent as a deferral.

For example, a businesses that has experienced a 50% decrease in its revenue, that paid $10,000/month in rent, will have $2,500 of this waived with no recourse (i.e. lessee has no obligation to repay this amount), and another $2,500 will continue to be paid. The remaining 50% of rent is to be decided between landlord and lessee as to whether this will be deferred.

Especially for businesses that closed during parts of Covid period, who are now trading again but not to full revenue capacity, no repayment of missed payments should commence until Jobkeeper[4] ends (October 24th) or their existing lease expires. Note this must take into consideration a ‘reasonable recovery period.’

The term ‘reasonable recovery’ has been addressed in the recent NSW Court of Appeal decision of Sneakerboy v Georges Properties Pty Ltd (No 2) [2020]. As a retail tenant (in sales of footwear) with five stores around Australia, Sneakerboy was making late payments during the COVID-19 pandemic due to a sudden decline in revenue[5] . Here, the court accepted that ‘subsequent reasonable recovery period’ should be no less than six months after the pandemic period. However, it was also stated that this does not seem like a long period for other businesses to recover, and thus this period is very fact dependent. This is currently the only precedent on this subject.

The safest way forward for businesses seems to be engaging in these negotiations with their landlords now. For some, this will be deciding not to take a rental deferral, but rather a larger waiver. This sees businesses not having to pay the money back, and rather they continue to pay slightly higher rental amounts.

Tim reiterates the purpose of the Code as helping businesses to essentially hibernate over this pandemic period. Landlords should be helping their tenants to ensure that the commercial leasing market can come through this period strong. This is clear in the government’s support of landlords, by encouraging bank’s to allow interest free periods including extra support such as reduction in land taxes, for example.

This should create a flow on effect, whereby any relief enjoyed by a landlord should be passed on to their tenants (for example, experiencing reduction in statutory charges, tenant should be able to receive benefit from this).

Steps for businesses:

  • Have experienced 30% drop in revenue
  • Ask landlord for rental waiver and deferral
  • Negotiate with landlord about what a ‘reasonable recovery’ situation entails in specific situation
    • Note that the payment of rental deferral must occur over the balance of the lease term (no less than 24 months)

If you can't come to an agreement?

  • Small Business Commissioner can be applied for mediation, and although not binding this is a good first step to resolve in any issues
  • Tenant and Landlord encouraged to provide extensive documentation in order to try and resolve the matter
    • Noting that during this unprecedented time there is little guidance
    • Also noting that current jobkepper period ends 24th October
  • Getting information out on the table to show good faith of both parties and aim to preserve relationship

Engaging legal advice:

  • The Code is quite difficult to understand, and having a lawyer explain this can leave businesses more empowered in negotiations
  • SaucedIt platform provides express legal health checks for business (for $750), the purposes of which are to review businesses and ensure that they do not encumber significant costs