This article was written by Chris Wheeler and Liam Carroll
- Not unexpectedly, the ACT Government has announced a new tenancy declaration to assist commercial tenants with leases subject to the Leases (Commercial and Retail) Act that have suffered financial difficulty as a result of the COVID-19 induced lockdowns.
- While the New Declaration imposes the same requirements as Previous Declarations, requiring landlords to engage in good faith negotiations prior to taking enforcement action like issuing a termination notice or seeking to recover unpaid rent, it introduces new eligibility requirements with further concessions for impacted not for profit tenants.
- The New Declaration introduces a tiered system of eligibility, whereby a not for profit tenant will be eligible for relief if it incurs a decrease in turnover of at least 15%, while for any other tenant there needs to be a decrease in turnover of 30% or more.
- The New Declaration applies to tenant reductions in turnover from 12 August 2021 and continues until the end of the COVID-19 emergency in the ACT (whenever that may be declared).
- The declaration will not apply to new leases entered on or after 12 August 2021.
- The ACT Government is expected to announce incentives in the form of land tax and rates relief in the coming days, which are expected to be consistent with the modest concessions provided in response to COVID related lockdowns in 2020.
The New Declaration
The ACT Government announced on 1 September 2021 the introduction of the Leases (Commercial and Retail) COVID-19 Emergency Response Declaration 2021 ("New Declaration") to assist commercial tenants financially impacted by the latest COVID-19 related lockdowns.
The Prescribed Period
The New Declaration takes effect retrospectively in relation to financial difficulties from the date the lockdowns were introduced on 12 August 2021 and will continue until the ACT COVID-19 emergency declaration ceases ("Prescribed Period").
We have previously analysed the first two instalments of the Leases (Commercial and Retail) COVID-19 Emergency Response Declaration 2020 ("Previous Declarations") in our alerts on 12 May 2020 and 15 September 2020.
While the New Declaration shares many features with the Previous Declarations, it has key differences in relation to who is eligible for relief.
Eligibility for relief
The New Declaration applies to a tenant under a lease the subject of the Leases (Commercial and Retail) Act 2001 that was entered into before 12 August 2021 (though including a renewal of a pre 12 August 2021 lease and a lease arising under a holding over under a pre 12 August 2021 lease). Under the Previous Declarations, eligibility for relief was primarily based upon whether the tenant was eligible for the JobKeeper program. With the expiry of the JobKeeper program in the intervening period, these eligibility requirements have been updated.
Decline in turnover test
The new eligibility requirements introduce a tiered system based on a 'decline in turnover test'.
To be eligible for relief, the tenant must establish that during the Prescribed Period:
- if it is a not for profit business, that it has incurred a decrease in turnover of at least 15%; or
- if it is any other business, that it has incurred a decrease in turnover of at least 30%.
A tenant will be deemed to satisfy the 'decline in turnover test' if the tenant's turnover decreases by the requisite amount in any month within the Prescribed Period (including August 2021).
The decrease in turnover will be calculated by comparing the business' turnover in a particular month relative to the business' turnover in the same calendar month in 2019. If the business was not operating in 2019, the comparison will be against the same calendar month in 2020 or if no such prior comparable month, a comparable amount agreed in good faith by the landlord and tenant.
Tenant must be an SME
The New Declaration also only applies to a tenant that is a small to medium enterprise (ie with an annual turnover less than $50mil), which is in line with the previous eligibility requirements with similar treatment for franchised businesses and company groups.
The New Declaration imposes the same requirements as Previous Declarations requiring landlords to engage in good faith negotiations in accordance with the National Code of Conduct prior to taking enforcement actions such as issuing a termination notice or seeking to recover unpaid rent.
A qualifying tenant will also be entitled to the same rent relief as under the National Code of Conduct – a proportionate reduction in rent during the Prescribed Period with 50% of that rent reduction as a waiver and the balance deferred over the greater of, the balance of the lease term and a period of no less than 24 months.
The ACT Government is also expected to announce incentives in the form of land tax and rates relief for landlords that offer rent relief to tenants affected by COVID-19. The relief is expected to be consistent with the modest incentives provided in response to COVID related lockdowns in 2020. Due to the minimal nature of the relief and the practical difficulties associated with applications, we expect that some landlords are unlikely to engage with the relief available.