Rent relief: what do you do if you are your own landlord?

The National Cabinet’s mandatory code of conduct for commercial tenancies is now starting to be implemented by each of the States, with most of the States providing announcements around their versions of concessions for landlords.

Generally the concessions are taking the form of discounts, rebates and deferrals of land tax. 

While the Federal Government has put forward the mandatory leasing principles as a form of relief for Small to Medium Enterprise (SME) tenants that have been impacted by COVID-19, the guidelines also suggest that similar principles should be applied with those that fall outside of the eligibility thresholds. All landlords and tenants are encouraged to discuss options and share the pain.

There is no doubt the guidelines provide significant relief to the tenant, however it is primarily funded by the landlords – particularly where the business tenant has been required to close its doors and had 100% of its income impacted, which is now effectively needing to be matched through a rental waiver (of at least 50%) and deferral of the balance of rent it usually pays.

The premise of the guidelines is that concessions from the States will be afforded to those landlords that comply with the Code and offer rent relief to their tenants. But is this enough for landlords who have debt obligations? For many, the actual value of any land tax concession will be a fraction of the rent they have forgone in complying with the Code.

How does this play out in a related party scenario?

It is common practice for groups, whether private or corporate to invest in the properties that are utilised in their main business activities. Whether it be a retail store, warehouse, factory, medical suites or office space, there is often a landlord involved who is related to the tenant entity that undertakes the core business. Depending on the type of premises, this may also include external tenants as well as the related parties.

Applying the guidelines to a related party scenario also requires actions to be taken by the tenant and landlord. The national code of conduct makes no mention of allowances for related party arrangements and as such, where the tenant is eligible for the JobKeeper program and has a turnover of $50m (no word yet on whether this turnover threshold is just the tenant entity or their group of entities), there will be a requirement for the landlord to provide relief. This is being further reinforced by the requirement to demonstrate any savings in land tax or council rates (where on offer) are being passed on to the tenants, before landlords are eligible for the relief.

The guidelines provide opportunity for negotiation between landlords and their SME business tenants and while the requirement to provide proportionate relief in line with turnover decline (ie the extent of the relief) doesn’t appear to be an available negotiating point – the mix of this relief can be agreed by both parties outside the guidelines. For example the tenant may consent to waiving the requirement to receive 50% of the relief as a rental waiver (ie rent free) and agree a lesser discount with more as a deferral – however the overall extent of relief under the code can’t be amended, just the components.

While we wait for the States to individually legislate the code of conduct so we can assess the extent to which actions need to be taken by related landlords, we would suggest the longer our period of hibernation continues the more serious this issue will become as the dollar value of required relief grows.  

One thing is certain – the degree of uncertainty that landlords and their tenants are currently operating in can be a cause of great distress from both sides – and the powers of negotiating with compassion have never been more important. At least with a related party arrangement you are doing so with full disclosure and understanding of the financial position of who you are negotiating with.