Frustrations mount at NSW government handling of commercial rent negotiations during coronavirus

The NSW government recently legislated elements of the national commercial tenancy code of conduct through its Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the Regulation), which is set to last for six months.

Mr Hassan, managing director of WR Partners, said he knew of several tenants who had requested rent waivers who did not meet the requirements set out in the code of conduct.

“We’ve had tenants saying that we may have had a downturn of 10 per cent – they’re not showing a loss of 30 or 50 per cent like the code requires. At a certain time, some tenants just stop paying rent,” Mr Hassan said.

Mr Hassan said this left landlords in a difficult position, as they were unable to evict the tenant under the six-month moratorium that was part of the code of conduct.

“Then the lessor, due to the code of conduct, can’t kick them out of the building and they can’t make claims on their bond,” he said.

He pins the blame on a lack of clarity from the state government over tenant and landlord rights under the code of conduct.

“People don’t have a proper understanding of the code of conduct and the state government hasn’t taken ownership in assisting lessors and tenants from a commercial perspective,” he said.

While the “majority of lessors have come to the table for tenants who are genuinely doing it tough,” Mr Hassan said there was a “huge misconception” as to what tenants needed to do in order to become eligible for assistance.

“Some of them are taking advantage of that. The key thing is they need to show financial proof.”

The office of NSW Minister for Finance and Small Business, Damien Tudehope, clarified that the Regulation – including the ban on evictions – only applies to tenants who businesses who had an annual turnover less than $50 million in 2018-19 and have experienced at least a 30 per cent decline in turnover, compared with a corresponding month or quarter in 2019.

“The implementation of the mandatory code of conduct is about striking the right balance of supporting eligible businesses suffering financial distress as a result of COVID-19 and protecting the interests of landlords,” Minister Tudehope said.

“The intent of the mandatory code of conduct is for tenants and landlords to work closely with each other to get through this difficult time.”

Confusion over outgoings, start dates 

But there’s frustration being felt by tenants too.

A director of a high-end wholesale furniture business in Sydney, who did not wish to be named due to ongoing negotiations with his landlord, said the code was not clear about whether outgoings, such as land tax and rates, should be included in these negotiations over rent reductions.

His business has qualified for the JobKeeper subsidy and was therefore eligible for a reduction in rent commensurate with the business’s reduced turnover – which he estimated at 40 per cent since the pandemic set in – but his landlord had so far refused to include outgoings in any negotiation.

“I pay a gross rent including outgoings and they’ve said the outgoings component is not eligible for a discount,” he said. Outgoings make up more than one-third of his business’ entire rental bill.

“The code only discusses outgoings in relation to the landlord passing on to the tenant what benefits they receive. I have not heard if my landlord has applied or received any benefits as yet.”

Leasing principle 8 of the Retail and Other Leases (COVID-19) Regulation 2020 only mentions the waiving of outgoings “where appropriate” when the tenant is not able to trade.

“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,” the Regulation reads.

The furniture wholesaler said one of the biggest frustrations was the lack of information from the state government and how vague the code of conduct was.

“I’ve got more information out of the media and friends than looking at the government websites – I know it’s policy on the run but there needs to be some clarity for people like me who are in a vulnerable position.”

Another issue where the code provided little clarity was the date at which rent waivers and deferrals were due to start.

“The JobKeeper starts in April but the pandemic started in March and effectively the turnover was affected in March. There’s no actual start date that’s been clarified, so therefore my landlord has said it starts in April. Because the code of conduct is so vague on the issue, they have made it suit them,” he said.

Deferring rent may cripple businesses 

Even if outgoings are eventually included in their negotiations, the furniture business faces years of recovery following the pandemic.

Under the current commercial tenancy code of conduct, only 50 per cent of rent relief for commercial tenants receiving the JobKeeper payment needs to be in the form of a waiver. The rest may consist of a deferral in rent, which will need to be paid back over a 24-month period.

“I’m paying 3 per cent increase [in rent] every year, which is roughly three times CPI, and then to have that rent deferral on top of that over the next two or three years is going to be near-on impossible,” the director of the furniture business said.

“It was already quite difficult in our industry before the pandemic. We could hear the talk of the recession – when you’re in that discretionary section of the market, you can feel that volatility.”

According to Anne Nalder, chief executive of the Small Business Association of Australia, it will be a similar story for many other small businesses caught up in the pandemic.

“It’s a vicious cycle,” she said. “Prior to the coronavirus, the economy was soft even then. We had the bushfires, floods, so small businesses were already struggling prior to that – they were flying by the seat of their pants.

“Depending on the size of the business, going into debt during the pandemic is all very well but it won’t be sustainable for many.

“When we get back to a bit more of the economy moving on, my belief is that it won’t be business as usual. This is a once-in-100-year phenomena, when those things happen nothing goes back to how it was,” she said.

Land tax relief not helping 

Tony, a landlord who owns four commercial properties in and around Sydney’s west, recently concluded negotiations with a tenant over rental discounts.

“We just finished negotiating with a tenant and, because the proof wasn’t forthcoming, we’ve stuck with the existing rent,” he said.

A lack of guidelines from the state government had led to tenants not understanding the requirements for eligibility, and that businesses “receiving the JobKeeper and the cash injection on payroll” were adequately positioned to keep paying rent, he said.

“There’s always [more than one side] to a situation and you don’t begrudge them [but] the government has come out there without a proper policy before the announcement, hence the tenant wakes up the next morning thinking they can ask for a discount.”

He said the NSW government’s condition that land tax discounts must be passed onto tenants made for an impossible situation for those landlords who were no longer receiving any income.

“The basic trouble is that land tax doesn’t stop. Land tax is the biggest problem with commercial properties because if people aren’t in a position with the rent, the landlord still gets stuck with all of the costs.

“I have people I know who can’t afford to pay their rates by council, they can’t afford to pay the land tax; these people are still suffering as much as these tenants.

“They might be giving them a bit more time to pay but they haven’t really given a resolution to the landowners … The tenants have got the ability to negotiate with the landlord but who is the landlord negotiating with?”

This story has been updated to include comments and information from the Minister for Finance and Small Business, Damien Tudehope.