The long-awaited government response to the effect of COVID-19 on commercial tenancies has been released. The government is not “bailing out” tenants whose business has been affected by the pandemic, but is instead imposing a code of conduct (Code)on landlords and tenants to facilitate negotiations about temporary, bespoke and appropriate arrangements, taking into account their particular circumstances.
The implementation of the Code is left to each State and Territory, so there are slight differences across each jurisdiction. The fundamental principles are consistent nationwide.
Who does the Code apply to?
Each State and Territory differs very slightly in terms of when the Code will apply, however in general if a tenant is eligible for the Commonwealth government’s JobKeeper payment and has less than $50 million in annual turnover, the Code will apply to its lease.
The turnover requirement is measured at an individual business level: individual franchisees aren’t grouped with an entire franchise group for calculating turnover.
What is the purpose of the Code?
The objective of the Code is to balance the interests of landlords and tenants operating small to medium businesses during the COVID-19 pandemic, and to compel them to negotiate their own temporary arrangements to give tenants a time to recover from hardship suffered during the pandemic.
Importantly, the Code is designed to be applied on a case by case basis. This means that the parties must consider the financial hardship suffered by the tenant, the terms of the lease and the surrounding circumstances.
What does the Code require?
Some of the overarching principles in the Code are:
- Both landlords and tenants have a common interest to ensure business continuity and the resumption of normal trade after the pandemic period.
- Parties must be open, honest and transparent, and provide each other sufficient and accurate information. Tenants should expect to produce trading data and financial statements to landlords. This disclosure might be necessary to secure temporary rent relief during the pandemic, tenants should keep in mind that handing that information to a landlord might aid the landlord’s negotiating position in the next market rent review.
- Landlords and tenants are encouraged to assist each other in dealing with external parties including government authorities, utilities and financial institutions (e.g. to negotiate relief in rates).
In addition to these guiding principles, the Code imposes the following restrictions and requirements on parties:
- A landlord cannot terminate a lease during the pandemic period (and a reasonable subsequent recovery period) for non-payment of rent, or draw on any security deposit or bank guarantee provided by a tenant.
- Tenants must still comply with their leases. If it does not, it forfeits the protection provided to it under the Code.
- Landlords must offer proportionate rent relief in the form of waivers and deferrals.
The total rent relief must be in proportion to the reduction in the tenant’s trade due to the pandemic.
Any waiver of rental can’t be recouped by the landlord after the pandemic period.
- Any rental waiver or rent free period must be at least 50% of the total rent relief offered (unless the tenant agrees otherwise).
For example, if a tenant’s revenue has fallen by 50%, it will likely be entitled to relief equivalent to 50% of the rent. This will mean that 25% of the rent will be waived, and the remaining 25% deferred.
- Any deferred rent is to be paid off for a period of at least 24 months from the end of the pandemic period. If more than 24 months remain on the term of the lease, then the tenant must be allowed to repay the deferred rent over that longer period.
- Any reduction in statutory charges (e.g. outgoings such as land tax or council rates) received by the landlord during the pandemic period must be passed onto the tenant.
- Landlords should try to share benefits they receive as a result of the deferral of loan repayments from their financier with the tenant.
- A landlord should waive recovery of outgoings from its tenant where possible while the tenant is not trading. Landlords can reduce the availability of the relevant service during this time (e.g. cleaning services).
- Landlords cannot impose any fees, interest or other charges in relation to deferred or waived rent.
- Tenants should be given an opportunity to extend their lease for the period of any rent deferral to be able to trade after the pandemic period to recoup some of their losses.
- A landlord must freeze any rent increases for the duration of the pandemic and a reasonable subsequent recovery period following the pandemic. The freeze on rent increases does not apply to rent based on the tenant’s turnover, where that is applicable.
- A landlord cannot punish the tenant for reducing its opening hours or ceasing to trade due to the COVID-19 pandemic.
What if the parties can’t reach agreement?
If the parties cannot reach an agreement on temporary arrangements, the parties will be referred to a binding mediation. These mediations will be carried out by existing State and Territory bodies tasked with mediating retail and commercial tenancy disputes.
The most important thing a tenant can do is to be proactive and commence dialogue with landlords early. Going into a discussion, both landlords and tenants should firstly understand their legal rights, and be prepared to provide evidence of any claims that they make during that discussion.
Having a healthy and reasonable dialogue will give parties the best opportunity to not only agree to terms that will apply during the pandemic, but will also set the tone for their relationship after the pandemic subsides: good faith shown by all parties now will undoubtedly be remembered long after the pandemic is in our past.
– Richard Pedley, Partner at Lawcrest