My business is temporarily closed due to the COVID-19 lockdown, do I still need to pay rent?

For businesses temporarily shut down due to the lockdown, most will be wondering how they will be able to afford their rent.

And given they’ve closed through no fault of their own, is it fair to expect them to pay rent? 

The good news is that if you don’t pay your rent or are delayed, you won’t be evicted, at least in the short term.

The government, in an effort to keep businesses in “hibernation” for six months rather than closing permanently, has announced there will be a six-month moratorium on evicting commercial (and residential) tenants who can’t afford their rent. 

Recognising that commercial landlords who don’t receive any rental income may struggle to pay their mortgages, the banks have announced a six-month mortgage holiday period where landlords won’t be expected to make repayments.

This is good news for tenants as it incentivises leniency among landlords. 

So, do you need to pay rent?

The short answer is yes, you will need to pay rent, but not the same amount, so long as your business is eligible. 

The federal government has been urging businesses to talk to their landlords about their rent, yet without a framework in place, there was a lot of confusion and uncertainty about whether businesses indeed had to pay rent. 

Now the federal government has announced a mandatory commercial tenancies code, which will be legislated and regulated in each state and territory to guide negotiations throughout this crisis and ensure they are undertaken in good faith. 

Businesses will be able to negotiate for a reduction in rent or a deferral of payment, so long as they have a turnover under $50 million and are eligible for the JobKeeper program which means they have experienced a 30% drop in revenue or more as a result of coronavirus. 

Any rent reductions must be proportional to the revenue reduction suffered by the tenant. This will be achieved through waivers and deferrals in rent. The waivers must account for at least 50% of the reduction in business and deferrals must be for the remainder of the lease term and for no less than 12 months. Landlords cannot terminate the lease. 

How to talk to your landlord

Even prior to the announced changes, most landlords would have been open to negotiating.

Even once the rules are lifted, many landlords will be reluctant to evict given the difficulty of attracting another tenant in the current conditions. This puts you in a stronger position to negotiate. 

Have your lawyer review your lease to see whether there are any terms regarding rental abatement or force majeure. Force majeure refers to significant and unusual events (like a pandemic) which may alter your lease obligations. 

If you negotiate a deferral, make sure you have a clear understanding of when you are expected to pay at a later date. If you negotiate a rent reduction make sure you discuss how long this will last.

Make sure any agreements made with your landlord are formalised in writing. 

But remember, the current situation won’t last forever.

Once conditions return to normal and the old rules are back in place, you will be expected to pay your rent and you can be evicted if you don’t. So make sure to factor this into your forecasts.

It’s also important to maintain a good relationship with your landlord to keep you going throughout this period and into the recovery. 

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