Lockdown Leases: A guide for commercial landlords and tenants.
As the ACT enters its sixth week in lockdown, many small business owners are feeling the impacts of lockdown hard.
Important changes to the obligations of commercial landlords and tenants have recently come back into effect, which will affect many business owners in the ACT.
On 2 September 2021, the Leases (Commercial and Retail) COVID-19 Emergency Response Declaration 2021 (the Declaration) came into effect.
The Declaration re-instates various obligations on commercial landlords and tenants that were previously in force at the start of the COVID-19 pandemic here in the ACT, as follows:
- Landlords must negotiate in good faith with any “impacted tenant”;
- Landlords and tenants are to have regard to the “SME Commercial Leasing Principles”, contained at Schedule 1 of the Declaration, in any negotiations; and
- Landlords are prevented from issuing a termination notice for non payment of rent unless the landlord has engaged in good faith negotiations.
What are “good faith” negotiations?
The Declaration defines “good faith” negotiations as follows:
6 – Meaning of good faith negotiations
(1) For this instrument, a lessor engages in good faith negotiations with an impacted tenant if the lessor, in acknowledging the financial hardship suffered by the tenant because of the economic impact of the coronavirus disease 2019 (COVID-19), negotiates with the tenant having regard to the overarching principles and leasing principles set out in the code of conduct.
What are the SME Commercial Leasing Principles?
You can find the SME Commercial Leasing Principles at Schedule 1 of the Declaration. I could set them all out for you, but your might stop reading. In short they really require tenants and landlords to share the pain (rent reductions commensurate with revenue downturns), share the wins (landlords to pass on any reductions in rates etc) and be in this together (freezes on rent increase until the end of the pandemic).
Who does the Declaration apply to and who is an impacted tenant?
The Declaration applies to a “prescribed lease”, meaning a lease which the Leases (Commercial and Retail) Act 2001 (ACT) applies to, that was entered into before 12 August 2021.
An impacted tenant is a tenant of a prescribed lease, as described above, that meets the decline in turnover test described below.
The “Prescribed Period” of the Declaration is from 12 August 2021 to the first day no COVID-19 emergency is in force, or any later date as specified by the Minister.
What is a decline in turnover test and how does a tenant satisfy it?
A tenant will satisfy the decline in turnover test if the tenant’s turnover for any month within the Prescribed Period falls short of the tenant’s turnover for a comparison month. Where a tenant did not trade in 2019 or 2020, an amount of turnover is to be negotiated in good faith and agreed by the Landlord and Tenant.
What relief is available to Landlords?
The ACT Government has announced several measures in an attempt to assist business owners and owners of commercial business.
Eligible ACT businesses are able to apply for credits on certain fees and charges, such as payroll tax, utilities and rates. More information about the COVID-19 Small Business Hardship Scheme can be found here: https://form.act.gov.au/smartforms/servlet/SmartForm.html?formCode=1601.
Information about other COVID-19 economic support is available here: https://www.act.gov.au/business/business-support/covid-19-economic-support-for-business.
Additionally, owners of commercial property in the ACT are able to apply to ACT Revenue for support in relation to the payment of rates if during the period 12 August 2021 and 31 December 2021, they reduce rent for a tenant impacted by COVID-19 or have a business operating on the land that is impacted by COVID-19. Eligible Landlords in that regard can receive up to 50% of the rebate provided to their tenant, capped at the lower of $10,000.00 or the value of two quarters of rates in the 2021-22 period.
It is important to keep in mind that business’ applying for the COVID-19 Small Business Hardship Scheme are not eligible for support from ACT Revenue.
Help! I am a commercial tenant unable to pay rent/I am a commercial landlord with an impacted tenant – what do I do?
If you are a tenant that is unable to pay your rent, or a landlord with an impacted tenant – we are here to help you and you can give us a call on (02) 6279 4222.
At Aulich, we have a dedicated team of lawyers who are experienced with commercial leasing and are able to assist you with negotiating with your Landlord or Tenant.