Following the Government’s Code of Conduct  to protect commercial tenancies impacted by COVID-19, many landlords are now dealing with the practical, and perhaps unintended consequences, of this legislation.

Without clear direction many landlords now find themselves in a position where they may be exposed and at the mercy of their tenants.

WILLIAMS MEDIA spoke with Eva Vicic, lawyer and partner in national law firm McCullough Robertson Lawyers to understand a clearer path.

At a Glance:

• Clear picture needed of the tenant's financial position through P&L and A&L statements
• Check on insurance coverage for business interruptions
• Obtain advice before agreeing on a rental deferral or rent reduction

"The National Code of Conduct directs the parties to negotiate in good faith but how does a landlord measure the impact of COVID-19 on a tenant?" said Ms Vicic to WILLIAMS MEDIA.

"One way to assess the impact of COVID-19 on a tenant's business, is for the landlord to examine and understand the financial position of the tenant.

"If the tenant is genuinely in distress, it is in the best interests of both parties to get the full picture.

"This will include current and pre-COVID-19 turnover of the tenant's business as evidenced by Profit and Loss and Assets and Liabilities statements."

Ms Vicic said a landlord would be smart to ask what measures have been put in place by the tenant to mitigate COVID-19 loss, to profit-proof their business.

"As an example, a restaurant would have had to close their dining area, but are they doing take-away?" said Ms Vicic.

"A landlord could also ask a tenant if they have insurance coverage for business interruptions, although it is expected most insurance companies won't cover COVID-19 related risk."

Rental deferrals as opposite to rental reductions may also have unintended GST consequences, according to Ms Vicic.

"For rent deferrals, there is no agreement to reduce rent, rather it is deferred to be paid at a future date.

"A tax invoice still needs to be issued for the full amount of rent disregarding the deferred amount and that creates problems.

"A rent reduction is different and is a good approach as the landlord can issue a tax invoice and only pay GST on the reduced amount.

"It is best for landlords to check with their accountant or lawyer before entering into a rent reduction or deferral agreement with their tenant to ensure there are no unintended GST consequences."

Other alternative avenues of support for landlords include the legislation by each state of land tax relief, conditional on it being passed to the tenant, who is likely to be paying it through their outgoings.

"There is also a sense of concern among medium to smaller commercial landlords that sharp declines in rents collected may result in them breaching their lending covenants which would then push these landlords further into financial distress," said Ms Vicic.

"We would encourage the landlord to talk with their lenders to ask for a freeze on the banks' enforcement of their lending covenants.

"They can seek a deferral or waiver of interest for the period the landlord is affected by rental losses due to COVID-19 and even possibly obtain a break from fixed rates that were agreed on in a better economic climate than is being experienced now."

When negotiations with tenants are not going well, Ms Vicic encouraged a quick solution. 

"Concluding negotiations privately is quicker and cheaper than involving a third party," said Ms Vicic.

"Looking at dispute resolutions is a process that has not been tested yet for COVID-19 related disputes it may be better to work it out between landlord and tenant."

Commercial property agents out in the market agreed these were all important points to cover although it was obvious not one size fits all in most situations.

Andrew McDonald of Andrew McDonald Commercial in Dubbo said they also like to get a full picture of the tenants' financial situation.

"We do asked tenants for proof of the job keeper application," said Mr McDonald.

"And to provide us with some of their financials as proof of the downturn in sales so that we can present to owners for consideration."

Vincent Siciliano, principal of LJ Hooker Commercial, Perth said property managers are working harder than ever with both tenants and owners to find some middle ground.

"The other distraction that agents are finding is the opportunistic tenant that is looking for assistance when they may not necessarily require this," said Mr Siciliano.

"Property Managers and agents are working collaboratively however they are not accountants and experienced to review financials provided. 

"Many owners with reduced income are reluctant to seek accounting or legal advise because they simply cannot afford it.

"This does make it awkward to navigate and achieve an outcome."

Jock Dunn, Senior Executive of Ray White Commercial said a quarterly review into any agreement between landlords and their tenants should be undertaken.

"Reviewing the situation every 3 months takes into account any further positive or negative trading outcomes due to government directions," said Mr Dunn.

"During this time it will be financially advantageous to work with the tenant to remain at the end of this battle, rather than lose them and have to suffer no rent and incur the costs of marketing, competing with other landlords for tenants and paying additional agent fees." 

Adrian Pascoe, Director of Ray White Commercial Townsville told WILLIAMS MEDIA they have had issues with periodic leases and existing breaches.

“There is no rule with regards to a periodic lease or if the existing tenant is in breach of lease prior to Covid-19”

“With regards to a periodic lease, how does a landlord secure the deferral of rental payment especially if they are already in arrears?”

“We have come across a large amount of backlash asking for P&L's from tenants and their accountants. I guess we will start seeing businesses reopen and take the urgency off asking for rental assistance.”

Nick Witheriff of LJ Hooker Kingscliff / Casuarina told WILLIAMS MEDIA, "I think it’s important for any Commerical tenants who are seeking a rental reduction request or temporary COVID incentive to know that this is only available if they can show their current monthly turnover less due to COVID." 

"If the tenants business has seen no signs of a slow down than they must continue to pay their rent as per the lease."

"COVID isn’t an excuse to take a rental holiday if it’s not needed," said Mr Witheriff.

For further details on relief for commercial tenants click here.