Commercial Leasing - The Facts

By Peter Vickers | business, small business, tax, COVID-19, Accounting, Insurance, superannuation, Investment, News Highlights |

 COMMERCIAL LEASING CODE OF CONDUCT


Introduction

The issued document is headed ‘National Cabinet Mandatory Code of Conduct” However the National Cabinet has no power to make it mandatory. The document states that it is up to the states and territories give effect to the code.

What is the Time Period?

The reference is to the duration of the Pandemic starting with the beginning of the Jobkeeper programme from 30 March, 2020. It continues during a reasonable recovery period. Again a very fluid period that can go on for years.

Who does it apply to?

Applies to all commercial tenancies that are suffering stress as defined by the eligibility to the Jobkeeper programme. The details of this program are not fully known as they have only been announced by the Treasurer. The legislation for which parliament was recalled allows the Commissioner of Taxation to make the rules. It appears that you compare your turnover for March 2020 to your turnover in March 2019. We have had clients whose income in March went up and then is collapsing in April. For example doctors and surgeons last day of practice was 1 April before which they crammed in as many procedures as they could.

Is there a set formula?

No as the code says that each lease and each tenancy is different and the negotiation should take the actual conditions into account but

Yes there is a formula in that each party is to share the burden of the tenant equally.

What is the formula?

First you work out the effect on the tenant which could be from 0% to 100% loss of business.

The burden is shared equally between the tenant and landlord.

Half the burden will be relieved by a rent waiver which can never be recouped

The other half will be a deferral that will have to be repaid over the balance of the lease period or no less than 24 months.

This waiver and deferral is over the pandemic period and a subsequent reasonable recovery period.

There is no 6 month period as originally indicated.

Can a lease be terminated?

Not during the pandemic period or reasonable subsequent recovery period.

A tenant can extend their lease period by the same length of the waiver/deferral period.

Rents are to be frozen for the pandemic period and the reasonable recovery period.

What happens after this is over?

Both tenants and landlords need to understand that after this is over if one side has behaved badly, the other party has options. Both parties now have a considerable lead time to find alternate premises or alternative tenants. Currently there is a lot of retail space vacant but this may not continue. Tenants have a large investment in their fittings and there is considerable cost in moving. Remember that a landlord can take possession and may have a lien over any furnishings and equipment left on the premises. Landlords may have premises designed for very specific uses. 

The nature of business is also changing and the pandemic will increase the change. Business people nearing retirement may take this as an opportunity to retire early. Marginal business will close permanently and marginal commercial sites will be redeveloped.

What next?

This code does not apply to everyone. Both tenants and landlords need to seek advice and discuss options. The accounting records will become important to prove the level of distress being suffered.

Remember these are commercial arrangements and it is all about business.

A copy of the Code of Conduct is linked if you want some bedtime reading.  

Yours sincerely

Peter

Peter Vickers BSc BEc FCA
Principal

'Personal Services, Professional Results'

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