Extension of the commercial leasing code of conduct by state and territory governments could impose an extra $4.8 billion in costs on commercial property owners and potentially threaten the viability of many small and medium-sized commercial property businesses, the Property Council of Australia (PCA) has warned.
According to analysis prepared by Deloitte Access Economics for the PCA, the impact of the commercial leasing code on commercial landlord revenues for the five-month period from April to September is at least $4 billion to tenants under the code. This increases to $8.8 billion if the code is extended to March 2021, equating to an estimated 10 per cent fall in annual industry revenue.
In reality, rent relief has been provided to many businesses outside the framework mandated by the National Cabinet in April 2020. When these additional rental waivers are considered, the cost to commercial landlords over the five-month period from April to September is estimated at $6.8 billion, rising to $14.9 billion over an 11 month period, or a 17 per cent fall in annual revenue.
This scenario is more likely to reflect the actual level of rental waivers provided by the commercial property sector over the period to September 2020.
Chief Executive of the PCA, Ken Morrison, said the introduction of the commercial tenancy codes of conduct was an extraordinary intervention in the extraordinary circumstances where businesses were being forced to close under government direction to stop the spread of COVID-19.
“Extending the Code now would be disproportionate. The Code is unlike any government measure enacted on one sector of the economy in modern Australian history. No other advanced economies around the world have made a single sector disproportionately shoulder the cost of recovery,” Mr Morrison said.
“While the Code may have been justified during the extraordinary time in which it was conceived, it involves one part of the business community, many of them small owners, being legally obligated to give money to another part of the business community.”
Mr Morrison stated that no other sector of the Australian economy has faced a similar demand to waive legally incurred obligations.
“By contrast, the only other sector asked to assist through this time, the banking sector, has provided loan deferrals to SME businesses, but not loan waivers or interest-free periods.”
“Commercial property owners are highly motivated to support existing tenants who are experiencing hardship and were doing this prior to the code’s implementation – we don’t need extra regulation to do this,” he said.
“We have also seen perverse impacts from the code where some high-profile tenants have refused to pay rent even though they are legally required to do so.”
“The sanctity of the lease covenant has been a fundamental tenet of the Australian legal system and its primacy should be restored as soon as reasonably practicable to restore confidence in the market.”
“Extending the commercial leasing code will add billions of dollars in costs for property owners and investors with potentially serious consequences for the economy and financial system,” Mr Morrison warned.
These include the increased risks to the financial viability of commercial landlords and the consequences for the stability of the financial system as well as superannuation fund returns which have investments in real estate investment trusts.
Mr Morrison said the financial impact of the code had been felt across a range of commercial property owners and investors, ranging from listed real estate investment trusts, mid-tier and private property groups, self-managed super funds (SMSFs) and ‘mum and dad’ investors.
“Clearly, the risk is greatest for smaller to medium-sized owners and investors who may have more debt and weaker balance sheets,” he stated.
“These property owners are potentially also more exposed to domestic banks for lending with higher gearing ratios and at greater risk of breaching debt covenants.”
“If the intention of the commercial leasing code was to support small to medium-sized businesses through the lockdowns, governments must give equal weight to the interests of SME property owners and investors who have been hit hardest by the mandating of rent waivers and reductions,” Mr Morrison commented.
“The codes were created to respond to lockdowns of business and the economy, but cannot be perpetuated to where business has been able to reopen, albeit in challenging economic circumstances.”
“Extending the codes in states and territories where business has been able to reopen poses an unacceptable burden on another section of business, with potentially damaging consequences for our economic recovery,” Mr Morrison concluded.
