While the Government finalises the detail surrounding the commercial tenancy initiatives that are currently tabled, it is important to be aware that there are a number of other initiatives currently in play that may affect your clients with commercial properties.
Although this is an ever changing area, always remember to advise your client with caution and based on the advice at the minute, which may be subject to change. Please also note that most, if not all of these initiatives sunset, meaning that they have a finite duration following which, it is business as usual.
1. Relief for landlords for non-financial breaches of loans
By a Media Release prepared on 30 March 2020, the Australian Bankers Association announced that banks have agreed not to enforce business loans for “non-financial breaches” of the loan contract for a six month period commencing 20 March 2020. This measure is expected to cover 90% of all commercial property owners, and it is expected that small businesses struggling to pay rent will be protected from eviction.
The new measures will apply in all sectors of the economy, and on an opt-in basis, under the conditions that:
- for commercial property landlords, they provide an undertaking to the bank that for the period of the interest capitalisation, they will not terminate leases or evict current tenants for rent arrears as a result of COVID-19;
- the customer has advised that its business is affected by COVID-19;
- the customer was current in terms of existing facilities 90 days prior to applying; and
- interest is capitalised – meaning either the term of the loan is extended or payments are increased after the deferral period.
2. Mandatory Code of Conduct
The National Cabinet agreed that states and territories would implement a “Mandatory Code of Conduct” by either legislation or regulation (Code). The Code forms the basis of a set of “good faith leasing principles” for application to commercial tenancies (including retail, office and industrial) between owners / operators / other landlords and tenants, in circumstances where:
- the tenant is a small-medium sized business (annual turnover of up to $50m); and
- the tenant is an “eligible business” for the purposes of the JobKeeper program.
The Code prescribes that “it is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis”. The key thing to remember is that this Code is mandatory and in order to enforce it, the code will be overseen by binding mediation.
There are 14 “Leasing Principles” set out in the code. These are to be applied “as soon as practicable” and on a “case-by-case” basis.
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under the Code.
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
- Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
- If negotiated arrangements under the Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
- No fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferrals.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
- Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
While we wait for each state and territory to implement the Code in the statutory manner that they see fit, landlords, tenants and financial institutions are encouraged to “sit down together” to find a way through the issues they are currently facing.
In an announcement made as part of the ATO’s “Frequently Asked Questions” page, the ATO have announced that:
- a temporary rent reduction during the 2019-20 and 2020-21 financial years that has arisen as a result of COVID-19 financial impacts will not attract compliance action; and
- a reduction in the value of fund assets which would ordinarily contravene the in house asset rule will not attract compliance action where a “rectification plan” is implemented and was unable to be executed due to the failure of the market to recover.
The actual questions posed and responses given by the ATO are set out below.
Question: My SMSF owns real property and wants to give my tenant – who is a related party – a reduction in rent because of the financial impacts of the COVID-19. Charging a related party a price that is less than market value is usually a contravention. Given the impacts of the COVID-19, will the ATO take action if I do this?
Answer: Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of the COVID-19 and we understand that you may wish to do so as well. Our compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action where an SMSF gives a tenant – who is also a related party – a temporary rent reduction during this period.
Question: The downturn in the share market may result in the fund’s in-house assets being more than 5% of the fund’s total assets. The in-house asset rules would be breached. What do I need to do?
Answer: If, at the end of a financial year, the level of in-house assets of a SMSF exceeds 5% of a fund’s total assets, the trustees must prepare a written plan to reduce the market ratio of in-house assets to 5% or below. This plan must be prepared before the end of the next following year of income. If an SMSF exceeds the 5% in-house asset threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021. However, we will not undertake compliance activity if the rectification plan was unable to be executed because the market has not recovered or it was unnecessary to implement the plan as the market had recovered.
4. Advice provided by real estate agents
Whilst the Government assistance, concessions and stimulus packages are welcome relief for many businesses, in the spirit of what they are intending to cover, it is important that clients only access these relief measures if they genuinely need to do so.
In recent weeks, it has become apparent that certain professional organisations are endorsing these measures as opportunities and as part of the broader giving of “financial advice”. Recently, ASIC has become aware of real estate agents advising their tenants to apply for an early release of their superannuation as a means of ensuring that they continue to meet their financial obligations as tenants. This, in ASIC’s view, constitutes giving financial advice.
Not only is this irresponsible and potentially not in the best interests of the tenant, but in giving financial advice, real estate agents are contravening the Corporations Act which provides that financial advice may only be given by qualified and licenced financial advisers. Financial penalties for contravention can include up to 5 years’ imprisonment, fines for individuals of up to $126,000 or a combination of both.
We expect that ASIC compliance action in this area will only increase and will extend to the prosecution of any non-licenced advisors who gives advice to clients about the early release of their superannuation.
If you have any queries or require more information, please contact us.
We’re here to help.
Ann-Maree Ventura, Special Counsel