Pathology Rent 50% Rent Cut do you have to agree?

 

Source: http://medicalrepublic.com.au/

Practices do not consider immediately dropping your pathology rent yet, you may not have to.

Where pathology rent makes up to 50% of some practices income this may place make your practice insolvent. You may be forced to sell to another practice or your pathology company at a rock bottom price.

How will your existing pathology lease be affected?

  1. Watch out for trigger ‘uneconomic’ leasing terms in your agreement

If you did not seek independent legal and commercial advice you may have a problem. 

If so read this article on pathology pain we wrote in 2016 that remains relevant.

Practices that have used our process and templates will not have to be concerned. At the time of all negotiations, we had these corporate template clauses removed. 

We understand that many had not to save on costs, time or being seen not to be too difficult or ungrateful. This may be all good reasons but if you have taken out large loans for fits outs or lifestyle debts this has created much unnecessary uncertainty.

It is a small price to pay to get things done properly. We cannot be an expert at everything. It is critical now you get some professional advice. 

Ego and ignorance is the real enemy. You need to buy time.

  1. Are your sub-leasing arrangements e.g. pathology affected?

Rent relief measures for coronavirus affected businesses

On 7th Tuesday 2020 Prime Minister Scott Morrison announced, in a statement commercial lease arrangements will have to abide by a mandatory code of conduct.

This will see landlords need to reduce leases in proportion to the reduction in a tenant’s business revenue, due to the Coronavirus pandemic. 

It was agreed that states and territories would implement the…mandatory Code of Conduct (the Code), including via legislation or regulation as appropriate, to implement the principles agreed. 

The code is a set of food faith leasing principles to be applied to commercial tenancies between “owners/operators/other landlords and tenants in circumstances where the tenant is a small-medium sized business (annual turnover of up to $50 million) and is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.

The code is not yet law, as tenancy laws are regulated by the states and territories, however the Prime Minister said the code would be legislated and regulated for in each state or territory. 

It is important we need to see the fine print before doing anything.

Key Points to consider:

  • Landlords will be required to reduce commercial rents by same the proportion that a tenant’s revenue has decreased. Request their financial statements to validate their claims, preferably audited.
  • The tenant will have to be eligible for the job keeper program. Large corporate practices may not be elgible, in fact it is quite difficult for larger corporate entities.
  • The tenant needs to have revenue less than $50 million. Many pathology and diagnostic labs may not be eligible.
  • The policy will include a mutual obligation requirement on the small and medium sized businesses and not-for-profit tenants to continue to engage their employees through the JobKeeper Payment where eligible, and if applicable, provide rent relief to their subtenants.  Corporates will need to provide evidence of this.
  • The Government is acting as a model, by waiving rents for all its small and medium enterprises and Not-for-profit tenants within its owned and leased property. This could be handy if your practice is located on a Government facility.

The code covers:

  1. That leases cannot be terminated for non-payment of rent/
  2. Rent reductions will be proportional. Obtain proof first or no deal.
  3. If your turnover is down 50%, then your rent will reduce by at least 50% – and at least 50% of that reduction must be waived entirely. The other 50% of the reduction will be a deferral, to be paid back over a minimum of 24 months or over the term of the lease. It is worth considering when business picks up that a rent catch up clause is instigated. Consider extending one 5 year option period as valuable consideration.
  4. There must also be NO fees or charges associated with rent waiver or deferral – that is, a landlord cannot charge you interest or penalties for a waiver or a deferral. 
  5. There must be no rent increases during the pandemic period, and no penalties for reducing your hours, or closing your shop or your business. 
  6. Landlords cannot call on the security (the bond or bank guarantee) for non-payment of rent for the period of the pandemic. 

The code preserves existing lease arrangements and the relationship between the landlord and the tenant: “..it keeps the tenant in the property,” the PM said.

“The code brings together a set of good-faith leasing principles.”

“Landlords must not terminate the lease or draw on a tenant’s security. Likewise, tenants must honour the lease.”

Any arrangements between landlord and tenant will be binding by mediation and the mandatory code to be rolled out in each state and territory.

Principles of the Code:

The code sets out 14 principles to be common across the country. Some of these include: 

  • Landlords must not terminate leases for non-payment of rent during the COVID-19 pandemic (or reasonable recovery period).
  • tenants must stay committed to their lease terms (subject to amendments).
  • landlords must offer reductions in rent (as waivers or deferrals) based on the tenant’s reduction in trade during COVID-19.
  • benefits that owners get for their properties (e.g. reduced charges, land tax, deferred loan payments) should be passed on to the tenant (in the appropriate proportion).

Source: NATIONAL CABINET MANDATORY CODE OF CONDUCT SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19 PURPOSE

Where to from here?

Starting seeking the right kind of professional advice

This issue can be quite complex. Once you agree to something it is near impossible to undo. Most Courts are closed unless there is an emergency.

Seek financial advice to see if you are viable or not 

Seek appropriate professional commercial advice first i.e. call your accountant and specialised practice adviser. Health and Life are national Chartered Accountants and registered tax agents. We are also experienced in tendering and negotiating pathology, medical, pharmacy allied health leases.

Seek qualified and experienced legal advice 

Then seek appropriate legal advice before responding or even agreeing to any such requests. 

Note Health and Life are not lawyers. We can referred to experienced lawyers who specialise in pathology leases and have templates available for purchase. If this dramatically reduces your own income and the subleasing arrangements are with the entity you employ your staff you may be eligible for the Jobseeker program.

This is general advice do not rely or act on it until you seek appropriate specific advice about your own arrangements.

Register for the General Practice 101 Survival Guide and Checklist and Playbook Guide 
As read in the Medical Republic article 6 vital steps to take if your practice is in COVID-19 distress 

For other related pathology rent articles

New Excessive Pathology Rent Red Book Alert!

Pathology Rent Police

New Pathology Pain: Warning for GP Practices: There is a price for certainty!