Mandatory code of conduct for SME commercial leasing

Discussion in 'Commercial Property' started by Simon Hampel, 8th Apr, 2020.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    The National Cabinet has agreed that states and territories will implement a mandatory Code of Conduct for commercial tenancies (PDF).

    Purpose

    The purpose of this Code of Conduct (“the Code”) is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.

    These principles will apply to negotiating amendments in good faith to existing leasing arrangements – to aid the management of cashflow for SME tenants and landlords on a proportionate basis – as a result of the impact and commercial disruption caused by the economic impacts of industry and government responses to the declared Coronavirus (“COVID-19”) pandemic.

    This Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million (herein referred to as “SME tenants”).

    The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).

    The Parties to this Code concur that during the COVID-19 pandemic period, as defined by the period during which the JobKeeper programme is operational, the principles of this Code should nevertheless apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.

    Appendix I gives examples of proportionate solutions that may be agreed under this Code, and forms part of the overall Code.

    The Code has been developed to enable both a consistent national approach and timely, efficient application given the rapid and severe commercial impact of official responses to the COVID-19 pandemic

    ... read more

    Would be interested to hear any thoughts or feedback from our commercial landlords (and tenants!) about the new code. Do you think it will achieve the outcomes? How does it impact on you as a landlord. How does it impact on you as a tenant?
     
  2. UrbanPlanner

    UrbanPlanner Well-Known Member

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    The first thing that comes to mind is how this will impact the ICR with banks. If tenants don't have to pay rent, or get a 50% reduction, then the landlord would technically no longer meet it's ICR, and so would the landlord be in default of its mortgage? I know the landlord may be able to seek to defer repayments so this may solve the issue, but it's not been mentioned anywhere.
     
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  3. spuddy

    spuddy Member

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    and to further complicate matters... if you have the commercial property inside a trust structure, then ASIC company rules/legislation applies. Is there a risk of insolvent trading if the reduced income from the tenant will not cover your loan repayments (potentially zero rent?!). So much for "sharing" the pain.

    I have already received a letter of "demand" from my commercial (office) tenant for zero rent for the next 3 months. And it's not like they were offering to share their 25% gain in revenue growth over the last 3 years in terms of higher rent payments, so why should I absorb their pain :mad:
     
  4. spuddy

    spuddy Member

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    ok - I've just caught up on Terry's tip #277. Insolvency laws relaxed over the next 6 months so that is one less thing to worry about while we try and negotiate a middle ground with our commercial tenant.
     
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  5. FXD

    FXD Well-Known Member

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    I am gonna ask for lender repayment holiday relief matching the duration of rent waiver/reduction
    period as requested by tenant.

    My only question is if ATO will entertain the tax deduction claim for compounded interest built up
    within trust entity with corporate trustee vs individual ownership.

    Have read Terry's tax tips on this topic and looks like it's not a given so gonna have to work with
    my accountant to argue for the case but unsure what is the process, is it via application for
    private ruling or different means. Would be an interesting period ahead that's for sure.
     
  6. Property Guts

    Property Guts Well-Known Member

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    That Code of Conduct, very much about strengthening tenant rights. Based on a socialist code perhaps? Anybody familiar with commercial tenant rights in socialist europe? Is it true a landlord can't evict a tenant for non-payment of rent in France (pre&post-COVID)?
     
  7. Property Guts

    Property Guts Well-Known Member

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    That Code that fell out of Marx's pocket is unworkable! The banks will stop lending to commercial.
     
  8. sarcasm

    sarcasm Member

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    What do you think about Appendix I? Let's say their turnover is $300k a year. 50% loss in turnover would result in a guaranteed 50% cash flow relief. At a minimum, half provided as rent free/ waiver for the proportion of which the qualifying tenant's revenue has fallen (i.e if their rent was say $5k a month, their rent free/ waiver is $2.5k). The balance ($2.5k) can be deferred and recouped over at least 24 months. Let's assume due to the loss of turnover their expenses (of which rent is part) reduces, their net operating profit is approx $90k. Despite turning a profit, the landlord has to provide free rent and deferrals. How does this make any sense? I'm sure I'm missing something here, or interpreting it wrong...
     
  9. FXD

    FXD Well-Known Member

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    I can see turnover will go to straight to $0 for many tenants as there is no incentive for them to
    continue to trade in lower volume, if any, as the mandatory code now basically entitles them to
    handball the pains to landlord while tenants taking a break and still able to access stimulus.

    I know that if I were a trading tenant, I would be doing exactly the same as I am entitled
    offload the pain to the landlord
     
  10. FXD

    FXD Well-Known Member

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    It makes perfect sense because we live in a system where genuinely hardworking folks get penalised with tax. If you wanna get ahead further in life taking financial risks, you will be viewed
    as the greedy capitalist investor and get penalised even more.

    Hold on a minute, may be we are actually living in a socialist system after all ...
     
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  11. Tony3008

    Tony3008 Well-Known Member

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    In this case don't they get 50% written off, 50% deferred?
     
  12. Omnidragon

    Omnidragon Well-Known Member

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    So... revenue from some of our businesses has gone to 0 since its not open. So you’d imagine rent should be..... 0! For one of them all LL has offered us 0 rent for one year anyway because our lease just expired. The other few are in negotiation.

    As for landlord side. Depends.

    1 dodgy tenant gone awol but he’s been doing so since 1 March.

    A few reasonable ones have paid half rent. I’ve just waived the other half. These are all good guys.

    1 has not paid rent but deferred 100% of it (and because he’s a good guy I’m quite relaxed)

    A few haven’t heard back yet but least they paid March
     
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  13. Iamnumber5

    Iamnumber5 Well-Known Member

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    I am curious as to the outcome on the “demand” of zero rents for the next 3 months as I am having the same problem.

    What do you do in this situation?

     
  14. Scott No Mates

    Scott No Mates Well-Known Member

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    Assess the request on a case by case basis.
    • Has the business been forced to close eg beautician?
    • Is it a partial shutdown eg restaurant/coffee shop? What have they done to keep the cash rolling in? Eg pushing takeaways for restaurant meals
    • Are they working from home?
    • What evidence have they provided of their inability to trade?
    • Are they still able to pay outgoings?
    • Have they applied for Jobkeeper or other incentives?
     
  15. Iamnumber5

    Iamnumber5 Well-Known Member

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    @Scott No Mates appreciate the comment.

    Tenant trades as a wine bar which also allows take away. Not sure if they are categorized as bottle shop which is allowed to open for takeaway only, but they completely close the business, so no cash flow rolling in at all.

    I believe none of the outgoing is paid since March, as I just paid the building insurance on their behalf. April’s insurance is due in another week, and there is no sign that they are able to pay.

    March rent which is due at the beginning of the month is only partially paid. April’s rent has not been paid at all.

    Recent email I get from tenant is that they are unable to pay anything, and waiting for government grant as well as landlord’s contributions.

    Is mandatory code of conduct starting date 3rd of April? Does that mean that March rent should be paid in full? We have offered them rent deferral for the period of lockdown prior the code being announced, but they insisted of rental waiver (including March rent).

    We are trying to do the right things as a landlord but at the same time don’t want to be taken advantage of.



     
  16. Donna Grech

    Donna Grech New Member

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    I have a commercial tenant that has requested rent relief and I advised I will follow the mandatory code and requested a financial statement to confirm eligibility for Jobseeker & what percent loss of turn over. The lease expires in March 2021.
    I have a been told (heresay) that the business owner has wanted to get out of lease for some time (always late with rent) and is deliberately running the business down by not buying stock to show a huge reduction in turnover and therefore qualify for jobseeker. Apparently the demand is there from clients but no stock held( which is readily available through wholesaler).
    His goal is to close the business or operate at bare minimum until lease expires without paying rent.
    My goal was to help him continue to operate through & past this crisis & have a paying tenant.
    I would happily let him exit the lease as I have a potential tenant waiting to take the property over but he's not interested.
    What to do ? He is able to show reduction in turn over which I have to match with rent assistance. At the end he will declare bankruptcy but meanwhile has made my life harder by stringing us along so that he can milk all the assets from his business until nothing is left.
    I cannot prove this but have it on reliable source this is his intention.
     
  17. Omnidragon

    Omnidragon Well-Known Member

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    Well today we just walked from a place (our lease expired anyway).
     
  18. spuddy

    spuddy Member

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    In our case, we are one of 3 landlords that rent office space to the corporate office of a large (>$50 mill. annual turnover) retail chain. Some of their stores are still open and trading and they also have an online store that is trading. One of the other landlords offered them a 50% discount for the next 3 months, they sent an angry letter back via their lawyers to "demand" 100% rent forgiveness.

    Although they do not meet the SME definition to fall under the new Code, we have agreed with our PM and one of the other two landlords to use that approach so have requested evidence from them of the decrease in turnover they have experienced. The intent that then we can work out the 50% of decreased turnover as rent forgiveness, 50% as rent deferral with the preferred option to extend the lease term by 2 years and amortise the deferred rent over the lease extension period. So far they haven't replied but its been Easter so we will give them a few more days then try again.

    Looks like the new relief package announced in NSW is next to useless for commercial landlords/tenants as well unless you pay a heck of a lot of land tax.
     
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  19. sarcasm

    sarcasm Member

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    In the case of reduced turnover, could a landlord reasonably request figures relevant to the specific property which they own and not for the business as a whole (assuming the tenant operates multiple locations across various states)?