LEASING DURING COVID-19

MANDATORY CODE OF CONDUCT

SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19

Last updated: 8 May 2020

In these extraordinary times, this is a fairly common scenario.  A business experiences disruption caused by the economic impacts of industry and government responses to the declared Coronavirus (COVID-19) pandemic.  It loses business, starts to run out of cash and will be unable to make the next rental payment.  It approaches the landlord to request leniency, reduced rent, time to pay.  Many businesses are in the same boat, so if the landlord evicts the tenant, will it be able to find another tenant?  And if it does, what rent will the next tenant be able to afford?  Maybe it’s best to work with the current tenant.  And so negotiations begin. 

A Code has been developed to assist with these types of negotiations.  The Code is called the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles During CovID-19To implement the National Cabinet Code on COVID-19 Leasing, the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 were promulgated on 1 May 2020.  See our article here on the regulations.  If you would like more information, please contact us here.


​APPLICABILITY OF CODE

The Code applies to commercial tenancies (including retail, office and industrial) between landlords and tenants, where the tenant:

  • is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme,

  • has an annual turnover of $50 million or less, and

  • suffers financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme.

(For details of the JobKeeper programme, see here).

As a matter of good citizenship and commercial practice, landlords and tenants are encouraged to apply the Code to all leasing arrangements, even if the Code does not strictly apply. 

KEY PROVISIONS

A summary of key provisions of the Code is set out below.

  • No eviction.  Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).

  • Rent increases.  There will be a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements agreed between the landlord and the tenant.

  • Negotiations.  The landlord and tenant must enter into good faith negotiations regarding possible temporary amendments to the Lease, with the objective of aiding the management of cashflow for SME tenants and landlords on a proportionate and appropriate basis, based on the impact of the COVID-19 pandemic on the tenant (e.g. impact on revenue, expenses, and profitability) during the COVID-19 pandemic and for a reasonable recovery period thereafter.  The duty to act in good faith includes the duty to act in an open, honest and transparent manner, and must provide each other with sufficient and accurate information.  It also includes a duty to assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of the Code.

  • Tenant duties.  Tenants must continue to abide by substantive terms of their lease as best they are able (e.g. duty to maintain, clean and secure the premises, take out insurance), failing which they will forfeit any protections provided to the tenant under the Code.  (However, see “Penalties for reduced hours or cessation of trading” below).

  • Rent reductions.  Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.  (See "Example" below).

  • Rental waivers.  Landlords must waive (i.e. give up, forgo) rent of at least 50% of the total reduction in rent payable over the COVID-19 pandemic period.  A greater proportion of the total rent reduction should be waived in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.  No fees, interest or other charges should be applied with respect to rent waived.  (See “Extension of lease” below).

  • Rent deferrals.  Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.  No fees, charges nor punitive interest may be charged on rent deferrals. 

  • Reduction in rates, taxes, insurance.  If the landlord receives any reduction in statutory charges (e.g. land tax, council rates) or insurance, it must pass these reductions on to the tenant in the appropriate proportion applicable under the terms of the Lease.

  • Bank and other loan deferrals.  The landlord must seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to Landlords, with the tenant in a proportionate manner.

  • Outgoings.  Landlords should where appropriate seek to waive recovery of any other expense or outgoing payable by a tenant, under lease terms, during the period the tenant is not able to trade.  Landlords reserve the right to reduce services as required in such circumstances.

  • Security Deposit.  Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.

  • Extension of lease.  The tenant should be provided with an opportunity to extend its lease for an equivalent period of the deferral period and/or period of the rent waiver (to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes). 

  • Penalties for reduced hours or cessation of trading.  Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

  • Binding mediation.  Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.  Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.

*Recent Government Announcement.

 

Land tax.  To encourage landlords to assist their tenants, the Victorian Government has announced that it intends to pass legislation to the effect that if a landlord provides rent relief to tenants impacted by coronavirus, the landlord will be eligible for a 25 per cent discount on its land tax, while any remaining land tax can be deferred until March 2021.

EXAMPLE

 

The Code gives the following scenarios as examples of its application. 

 

Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis.

 

  • ie. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.

 

  • At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.

 

  • Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties.

 

  • So if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral.

 

  • If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.

 

  • Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.

 

  • The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.

 

The Code can be viewed here.

REGULATIONS

See our article here on the regulations.

DRAFT LETTER TO LANDLORD

To assist the business community, we have put together a template here which tenants could use as a starting point for a letter to their landlords.

RETAIL LEASES ACT

For information on the rights and obligations of tenants and landlords in relation to retail leases, see our article here.

ASSISTANCE AND ADVICE

 

If you would like our assistance or advice in relation to a Lease, please contact Rod Stumbles here.

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