Do commercial tenants still need to pay rent?
This is one of the questions landlords and tenants have been asking since the Government announced a Code of Conduct in early April. Implementing the Code has have proved to be more difficult than at first thought.
The National Cabinet Mandatory Code Of Conduct came into effect on 7 April 2020 (‘the Code’). Landlords and tenants are asked to come to their own agreement regarding rent and shutdowns due to the coronavirus. There is no established law governing payment of rent during the current economic shutdowns. Evictions have been outlawed for the time being, and payment of rent is a matter of negotiation between landlord and tenant on a case by case basis. Some tenants have been interpreting this as an automatic rent reduction. Some landlords have been insisting that business go on as usual. The truth lies somewhere in between.
Commercial leases do not normally have abatement clauses that allow rent to be suspended in the event of a pandemic. How should you respond to a tenant who approaches you for a rent reduction? Think before making a response. Responding too quickly has led many landlords to agree to too much too soon, a move they have already begun to regret. No response is not an option either, as both parties are obliged to communicate, or expose themselves to sanctions later.
What happens once you have negotiated an arrangement with your tenant? The agreement should be put in writing for two reasons:
- Landlords will want to record precisely when rent payments can be suspended, to what extent and when they may be resumed. Some landlords will allow rent to be waived entirely, granting the tenant a rent free period. Others will simply allow the rent to accumulate and go unpaid for a period, with the back rent to be paid back eventually. A combination of these approaches can also be applied. A few will not be required to grant rent reductions at all.
- The tenant wants to be sure that they will not be held in breach of their lease if they suspend payment of rent. The government’s Mandatory Code Of Conduct will eventually expire. Once this occurs, tenants may be evicted or locked out immediately if they fall behind in their rent, as was the case before the coronavirus. Being behind two weeks in rent is normally enough for a commercial tenant to be locked out in New South Wales. A written agreement from the landlord promising they will not do this gives the tenant some comfort that they will have time to get themselves up to date.
Any rent concessions should be documented precisely to protect both the landlord and the tenant. Further, they should be done in the form of a Deed. Legislation governing real estate says that agreements concerning real estate must be in the form of a deed in order to be binding. Most of the arrangements being put in place as the result of the coronavirus are temporary. Any agreement should specify that once conditions return to normal the original terms of the lease are resumed.
We have created a precedent set that gives you precedents for a letter to send to the tenant and one to the landlord to begin negotiation. A precedent Deed for the Temporary Variation of a Lease is included for recording agreements in writing. A concise Practice Guide and a copy of the code is also included.
The Practice Guide answers such questions as:
What is the difference between a waiver and a deferral?
What rules apply to deferrals and waivers which one should I implement?
What rules apply to deferrals and waivers and when should I implement?
Must a tenant still pay outgoings?
Outgoings must be paid unless a tenant is unable to trade.
What happens if a landlord and tenant cannot agree?
When do these obligations start and when do they finish?
The practice guide is designed as general advice that can be applied by commercial landlords to get them started and prevent them making costly mistakes. This is a quick an inexpensive way to get moving in the right direction.