What you need to know - Our guide to the Leases (Commercial and Retail) Declaration 2021
On September 1 2021, the ACT Legislative Assembly passed the Leases (Commercial and Retail) Declaration 2021 (Declaration) which reintroduced financial assistance measures for tenants experiencing financial hardship during the current ACT Government imposed lockdown. The Declaration is similar in its application and approach to the previous declarations that were in force last year. Landlords and tenants are still required to enter into good faith negotiations to determine any appropriate financial assistance, and landlords are prevented from taking certain actions with respect to a commercial tenancy unless they have engaged in good faith negotiations. However, there are some key changes.
With the Federal Government’s JobKeeper Program now a distant memory, the test to determine whether a tenant is eligible for financial assistance has been updated to a ‘decline in turnover’ test. The test requires tenants to demonstrate that they have had a 30% or more decline in turnover for a ‘corresponding month’ (or 15% or more if the tenant is a not-for-profit business).
This article will summarise the key changes in the Declaration as well as providing a “refresher” on items which are similar to previous declarations. It will also touch on the ACT Government’s proposed commercial rates concession for landlords who agree to rent relief measures with impacted tenants.
What has changed?
Prescribed Period
The ‘Prescribed Period’ under the Declaration commenced on 12 August 2021, being the first date of the ACT Government’s imposed lockdown, and will remain in force until:
the first day no COVID-19 emergency is in force; or
any later date specified by the Minister.
Prescribed Lease
A ‘Prescribed Lease’ under the Declaration has been slightly updated to mean a lease to which the Leases (Commercial and Retail) Act 2001 applies and includes:
any lease entered into before 12 August 2021;
an extension of the term of a lease made on or after 12 August 2021;
a renewal of lease entered into on or after 12 August 2021 that is on substantially the same terms as the original lease;
a lease arising, on or after 12 August 2021, from the tenant holding over after the end of the original lease.
Impacted Tenant
The Declaration provides that an ‘Impacted Tenant’ must be:
an SME entity; who
satisfies the ‘decline in turnover’ test.
The requirement for the Tenant to be an ‘SME Entity’ (ie a business with an annual turnover of less than $50 million) is similar to the previous declarations, and also excludes any tenant’s business that is part of a franchise group or larger corporate group.
Previous declarations required the Tenant to demonstrate that they were eligible for the JobKeeper program. However, as that program is no longer available, tenants must now satisfy the ‘decline in turnover’ test.
‘Decline in Turnover’ test
In order to satisfy this test, an ‘Impacted Tenant’ must prove that their turnover in the ‘Prescribed Period’ fell short of the tenant’s turnover in a ‘comparison month’:
for a tenant conducting business on a not-for profit basis – a decline in turnover of 15% or more; or
any other tenant – a decline in turnover of 30% or more.
Any month in the ‘Prescribed Period’ includes August 2021. The ‘comparison month’ is defined as the same month of 2019, or if the tenant did not carry out business in 2019, the same month of 2020. In the event the tenant did not carry business in either 2019 or 2020, the landlord and tenant must enter into good faith negotiations to determine an amount of turnover, and this amount will be referenced in determining the tenant’s eligibility.
It is important to note that turnover includes revenue from internet sales of goods and services, and any COVID-19 business support grants from the ACT Government.
Previous Declarations
With the announcement of the Declaration, it is important to note that any agreements or rights, remedies or protections that arose under the previous declarations, will not be affected by the Declaration.
What has remained the same?
In Good Faith Negotiations
The Declaration still requires landlords to enter into good faith negotiations with tenants before enforcing the commercial lease (ie taking a prescribed action), as was the case in the previous declarations. Both Landlords and Tenants should have regard to the overarching principles and leasing principles outlined in the National Code of Conduct when conducting ‘in good faith negotiations’.
As a “refresher”, the overarching principles are:
landlords and tenants share a common interest in working together, to ensure business continuity, and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during a reasonable recovery period.
landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes.
landlords and tenants will negotiate in good faith.
landlords and tenants will act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with this Code.
any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period.
the Parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of this Code.
all premises are different, as are their commercial arrangements; it is therefore not possible to form a collective industry position. All parties recognise the intended application, legal constraints and spirit of the Competition and Consumer Act 2010.
the Parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under this Code.
The leasing principles are:
landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
a landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
if negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
no fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
the tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
Rent Relief
An ‘Impacted Tenant’ under the Declaration will still be entitled to the same rent relief as provided under the previous declarations and the National Code of Conduct. Any agreed rent relief must be proportionate and can be accepted as a 50% rent waiver and 50% rent deferral, with any rent to be deferred over the balance of the lease term or for a period no greater than 24 months.
Local Business Commissioner
The supporting material under the Declaration suggests that the COVID-19 Local Business Commissioner will still be available to resolve any disputes that arise under the Declaration. Our understanding is that Brendan Smyth will continue in this role.
Are there any concessions for Landlords?
We understand that the ACT Government is intending to announce a range of concessions that will be made available to landlords that offer rent relief to tenants. At the time of this article, the ACT Government has suggested up to $5,000.00 will be reduced from commercial rates notices for complying landlords. However, no further information has been provided by the ACT Government.
