Rent relief negotiations are a vital component of the survival strategy for many businesses experiencing significant disruption due to COVID-19.

The National Cabinet’s mandatory Code of Conduct for landlords and SME tenants provides guiding principles for negotiating rent relief arrangements where tenants experience financial strain due to COVID-19.  However, many businesses may not survive if they cannot negotiate more favourable rent waivers than the minimum proposed in the Code.

The impetus for the Code is to assist SMEs to survive beyond the period of disruption. The Code diminishes the usual power imbalance in favour of landlords in rent relief negotiations, as it requires that landlords must provide relief so as to share the financial impact of COVID-19 on tenants.

The Code includes the following principles:

3.  Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals … of up to 100% of the amount ordinarily payable, … based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

4.  Rental waivers must constitute no less than 50% of the total reduction in rent payable …

5.  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 …

For a business that has had to cease trading due to COVID-19 and currently has no revenue, as a minimum, the landlord must waive 50% of the rent and defer payment of the other 50%, which accrues during the period of no revenue. After trading resumes, rent relief arrangements continue during the recovery period.

No one can be certain of the timeframe for the COVID-19 pandemic to end. When it does, disruption to business will dissipate but for some businesses there may be a long recovery period before revenue approaches pre-disruption levels.

When the Minimum Requirements Under the Code Will Not Be Enough

Many businesses may not ultimately survive if they cannot negotiate more favourable rent waivers than the minimum proposed in the Code. The problem is that where businesses have a significant drop in revenue, the reduction in profitability will generally be far greater than the minimum rent waiver proposed in the Code and they may incur losses they cannot recover from.

The table below illustrates the impact for a business assuming that:

• the business is forced to close for 4 months and has no revenue for that period;
• after re-opening, revenue for the next 8 months is 70% of the pre-disruption level;
• rent is waived as per the minimum proposed in the Code; and
• other expenses are reduced by 85% for the first 4 months and by 15% for the next 8 months.

For the 12 months’ disruption period, the business:

• experiences a reduction in revenue of $520,000 (65%) compared to a typical year;
• has $32,000 (27%) of its rent waived and $88,000 (73%) remains payable, of which payment of $12,000 (10%) is deferred; and
• has a decline in profitability of $197,000 which results in a loss of $137,000 for the 12 months’ disruption period.

Many SME businesses do not have significant financial resources and their profits effectively pay wages to their owners. Post-COVID-19 disruption, such businesses may struggle to survive if there is a lingering adverse impact on profitability and they have significant deferred rent and other debts.

Business owners need to assess the potential impacts of COVID-19 disruption on future trading and the financial position of their business. This is essential in order to plan and implement measures necessary for business survival, including negotiations with landlords and other creditors to obtain relief to the extent required.

How we can help?

Pearce & Heers is here to help with advice, assistance and solutions to overcome financial difficulties, including negotiations with landlords, financiers, the ATO and other creditors to overcome COVID-19 disruption. Our office phone number is 07 3221 0055 and contact details for our senior staff are below.