Calculating Rent Relief in a COVID-19 Environment: a look at some of the broader issues
For landlords and agents dealing with tenant requests for rent relief during the COVID-19 pandemic, the National Cabinet Mandatory Code of Conduct, which is designed to proportionately share the financial burden and business cashflow impact and simultaneously balance the interests of landlords and tenants, raises some interesting challenges for commercial property managers.
Most leases, unless the rent review methodology is a turnover rental formula and requires audited financial statements, generally DO NOT require a landlord or agent acting on behalf of a landlord to seek clarification of a tenant’s financial position. The Code, issued on 7 April 2020, has in effect ‘pushed’ landlords and agents into the unenviable task of asking tenants to provide proof that they have experienced enough of a reduction in their business income to warrant a level of rent relief.
But this is not the only issue. In specifying that landlords must offer affected tenants proportionate reductions in rent based on the reduction in their trade, the Code does not actually provide any formula or guidance for calculating that reduction in trade. Given that retail and non-retail tenancies will be affected differently – most notably those industrial manufacturing business tenancies that are not dependent on foot traffic to drive revenue – the concept of reduction and the mechanism for quantifying it need to be transparent, equitable and reflect the Code’s objective to address the financial impact of the pandemic on the business sector.
As the Code is to be implemented and regulated at state level, each state will tailor its legislation to take account of both retail and non-retail leases. It is hoped that once this happens, there will be clearer direction on how to calculate reduction in trade and what financial information is required as evidence of revenue downturn.
Until state legislation is forthcoming, the Code has essentially made this a negotiation process for the parties involved and is reliant on the application of principles such as fairness and propriety, with mediation a last resort.
Bearing in mind that many tenants will be requesting rent relief for April, May and June as a minimum, what evidence should a tenant provide to demonstrate reduction in trade and how useful is it as a decision-making tool for a landlord?
BAS and business records
As many tenants would not have seen a reduction in their income in March but would have experienced a dramatic reduction in April and be expecting the same in May, monthly or quarterly BAS statements up to 31 March 2020 cannot be relied upon to accurately forecast any loss of revenue.
Sales reports and income and expense reports held on business systems may not be accurate indicators as many businesses account for their income as it is generated, not when the funds are in the bank.
The only situation where BAS or other records may be useful is when the extent of the loss is obvious, for example, where a government directive has required a tenant close their business immediately.
Even if these records are made available, most agents and landlords would not have the expertise or experience necessary to interpret and apply such complex financial information. Landlords may need to seek advice from their accountants or financial advisers thus incurring extra expense at a time when their income is shrinking. Likewise, tenants already experiencing cashflow issues must incur additional expenses if their accountant or bookkeeper must prepare financials or BAS returns. Either way, this can add further stress to both parties.
Privacy dos and don’ts
For those agents and landlords requesting personal and financial information about tenants and their businesses, it is imperative that they are familiar with their responsibilities when it comes to dealing with such sensitive data. These are defined by law and included in real estate codes of practice.
The Privacy Act 1988 (Cwlth) protects the privacy of individuals and regulates how Australian Government agencies and organisations with an annual turnover of more than $3 million, and some other organisations, handle personal information. The act includes a set of principles that cover the collection, use, disclosure, storage, access to, and correction of, personal information.
When requesting any financial information from a tenant, agents and landlords should include a statement outlining how the information will be used, how it will be securely stored to maintain confidentiality and the time period for which the information will be retained. Maintaining commercial-in-confidence obligations may also be necessary if the provision of financial and other information might result in damage to a tenant’s business.
A tenant’s financial and any other business or personal information must be treated in the strictest confidence at all times. It can only be disclosed to a third party with permission from the tenant.
In addition to the Privacy Act, in Victoria, agents are bound by Estate Agents (Professional Conduct) Regulations 2018 – Part 2 Clause 7 – Confidential Information, which states that:
‘An estate agent and an agent's representative must not at any time use or disclose any confidential information obtained while acting on behalf of a principal, unless authorised by the principal or required by law to do so.’
An important note on the Code
While the Mandatory Code of Conduct applies to tenants whose businesses have an annual turnover up to $50 million and are eligible for the Commonwealth Government's JobKeeper Payment support program, for those tenants who do not meet the turnover threshold, the National Cabinet stipulates that the principles of the Code should still ‘apply in spirit’ to all leasing arrangements for affected businesses; however, this is not mandatory.
A final word …
Although we are currently living and doing business in strange and uncertain times, please remember that maintaining confidentiality and professionalism in dealing with tenants, landlords and their businesses is still paramount, and that such qualities will be remembered when life resumes after COVID-19.
Wendy Thomson WendyWho?
© copyright 24th April 2020