In response to the devastating impact of COVID-19 on businesses, a commercial tenancy code of conduct has been released. This will have dramatic impacts on both landlords and tenants. Here is what they need to know.
Mandatory Code of Conduct
On Tuesday 6thApril 2020 the National Cabinet released a code of practice for commercial tenancies (‘Code’) which will be effective from the date it is implemented by the relevant State or Territory and will expire when the Commonwealth Government’s JobKeeper Program ceases.
Application of the Code
The Code will be mandatory between landlords and “eligible” tenants” for all “commercial tenancies” (including retail, office and industrial). The meaning of commercial tenancies will need to be clarified by the legislation that implements the Code, although we anticipate the application to be quite broad. Eligible tenants will be those tenants who are suffering “financial stress or hardship”. Tenants eligible for the JobKeeper Program and with a turnover of up to $50 million (for retail corporate groups turnover will be assessed based on the entire tenant’s business group rather than at the individual retail outlet level) will automatically fall within the Code.
Proportionate Rent Relief
Landlords and tenants must begin negotiating in good faith as soon as practicable to come to an agreement on rent relief. The rent relief must be proportionate to a tenant’s reduced turnover and provided through rental waivers and deferrals.
Rental waivers - landlords will need to offer rental waivers equal to at least 50% of the total relief. For example if a tenant is currently paying $100,000 per year in rent and their turnover has reduced by 50%, the landlord is required to provide the tenant with a minimum rent waiver of $25,000 (equal to 50% of the relief) with a further $25,000 as a deferral of rent.
Rental deferrals - all deferrals of rent must be amortised over the greater of the balance of the lease term and 24 months. For example, if a tenant’s lease has 5 years remaining, then the deferred rent must be amortised over that entire 5 year period. However, if the lease only has 6 months remaining, then the tenant would still have a minimum of 24 months to cover the deferred rental payments (including a period of 18 months if the lease expires at the end of the 6 months).
Repayments of deferred rent should not commence until after the COVID-19 pandemic has ended (as dictated by the Australian Government) or the lease has expired (including any reasonable recovery period afterwards).
If an agreement cannot be reached between landlord and tenant, the parties are required to mediate.
Whilst not clear on our reading of the Code, we expect that turnover, in the context of assessing the tenant’s entitlement for proportionate rent relief for each tenancy will, like the JobKeeper Program, be assessed based on a comparable period in the preceding financial year.
Tenants must honour their lease agreements (subject to any negotiated amendments under the Code). Tenants do not have a unilateral right to terminate their lease. If there is a “material failure to abide by substantive terms of their lease” the tenant will forfeit their protections under the Code. It will be of interest to see whether the legislation provides clarity on these terms. That said, we expect that if a tenant refuses to negotiate with their landlord as required under the Code, and/or does not provide the landlord with any information to legitimately assess turnover, and/or refuses to pay rent proportionate to turnover, the tenant will not be protected by the Code.
Rental increases are prohibited during the COVID-19 pandemic and the reasonable subsequent recovery period. There is an exclusion for leases where the rent is based on turnover. This accords with the proportionality principle. Fees and interest cannot be charged in respect of rental waivers or deferrals and tenants cannot be charged (e.g. levies) if they reduce their opening hours or cease to trade due to the COVID-19 pandemic.
Reasonable recovery period
Many principles set out in the Code refer to a “recovery period”. The intent appears to be to ensure that rent is not reinstated to pre COVID-19 rates (and as set out in the original lease) if a tenant’s business has not recovered. Some industry experts believe that certain sectors may take an extremely long period to “recover” or may not return to pre COVID-19 levels at all. It will be interesting to see whether the legislation provides greater certainty on what is considered to be the “recovery period”. Otherwise, in our view, there will be a need for tenants to continue to provide financial information after the COVID-19 pandemic ends to ensure there is a valid assessment of the recovery period and when this period might end.
Information and Financials
Both landlords and tenants must provide “sufficient and accurate information”. Whilst this is defined in the Code the definition is vague. In our view, in order for the parties to be able to negotiate in good faith and assess the degree of financial stress or hardship a tenant is suffering, financials will need to be disclosed by the tenant including provision of weekly turnover figures (past and future), and the most recent P&L statement and balance sheet.
Termination and Security
If a tenant meets its obligations under the Code, landlords will be prohibited from terminating leases or drawing on security (e.g. bank guarantees) due to non-payment of rent during the COVID-19 pandemic period (and/or during the reasonable recovery period).
What should landlords and tenants do?
As above, the Code will come into effect when codified by law of the States and Territories. Therefore, it will be important to carefully review the legislation that operates to implement the Code in all jurisdictions. Once implemented, noting that the leasing principles under the Code “should be applied as soon as practicable”, we recommend the parties seek to negotiate rent relief as follows:
Provision of information - in order to assess any entitlement for relief, tenants should furnish information to their landlord (on a confidential basis) such as turnover figures and financial statements. Tenants should also confirm eligibility / participation in the JobKeeper Program.
Document agreed changes - if a negotiated outcome can be reached between the parties, we recommend that landlords and tenants document all agreed changes. This can be done by way of a deed of variation to the lease and/or a confidentiality deed. Oral agreements should be avoided as they can be uncertain or subject to dispute without supporting evidence.
Please click on the link below for a downloadable version on what landlords and tenants need to know.
We are facing uncertain and unprecedented times. Our job at Cowell Clarke is to help landlords, tenants and agents navigate through the constant changes to the law arising from COVID-19. Cowell Clarke’s Property Team has extensive expertise across the entire property sector.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.
COVID-19: What Landlords and Tenants Need to Know
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