At this time, a lot of businesses are suffering the effects of a downturn caused by the COVID-19 pandemic. The government has already announced a number of changes to assist financially distressed businesses.
The government has recently announced changes to commercial leasing to assist businesses in distress. The changes come by way of a new mandatory Code of Conduct for landlords and tenants (the Code). The Code has been developed by the National Cabinet and will be implemented by the State and Territory Governments. At this time, we do not know how the Code will be implemented in each State and Territory, however we will outline the general principles below.
We make the comment that the proposed Code has not been legislated and it seeks to interfere with the contractual rights of parties to contracts or deeds (leases) that are already in place. We question how the Code will seek to enforce actions upon landlords in circumstances where they have contractual rights under a lease.
It may be the case that it is simply a guidance on how the parties ought to negotiate in good faith and some guidelines, but the government information that has been released has proposed mandatory provisions. We will wait to see what the law (the legislation) actually says.
However, PLEASE NOTE, landlords and tenants should not be waiting for Code to be legislated and should be taking steps to negotiate in good faith NOW! Tenants who need to financial relief should be taking steps to negotiate options now. Landlords should be engaging in these negotiations in order to ensure they have a tenant into the future.
Information regarding the Code as it stands is dealt with below.
Who is Covered by the Code?
The Code applies to all tenancies that are suffering financial stress or hardship as a result of COVID-19. Specifically, businesses must be eligible for the Commonwealth Government’s JobKeeper programme and have an annual turnover of less than $50 Million.
To be eligible for the JobKeeper Programme, businesses must have an estimated reduction in turnover of at least 30%.
What will the Code Include?
The Code aims to balance the interests of both tenants and landlords and recognises the impact of COVID-19 pandemic on businesses large and small. The purpose of the Code is to impose a set of rules and guidelines on landlords and tenants in the negotiation of temporary arrangements to deal with the pandemic. The Code also recognises the need for businesses to negotiate in good faith and in an open, honest and transparent manner.
The Code imposes the following requirements:-
1. Landlords must not terminate leases due to non-payment of rent;
2. Landlords must offer proportionate reductions to the reduction of turnover to the rent payable in the form of waivers and/or deferrals. We will address this in further detail below;
3. Any reduction to land tax, rates, charges, insurance or other statutory charges received by the landlord, must be passed onto the tenant;
4. Where possible, landlords should seek to waive the recovery of outgoings while a tenant is unable to trade. Landlords are able to reduce services in these circumstances;
5. If a landlord and tenant come to an agreement under the Code and the agreement requires that the tenant repay money, then the repayments should not commence until the end of the pandemic or the expiry of the lease, whichever is earlier. Allowance should be made for a reasonable recovery period following the end of the pandemic;
6. If a tenant has provided security, whether it be a bond, bank guarantee or personal guarantee, the landlord must not draw on that security during the pandemic and a reasonable recovery period;
7. The landlord must provide the tenant with an opportunity to extend the lease for a period equivalent to the waiver or deferral period;
8. Landlords must not increase rent for the duration of the pandemic, and a reasonable recovery period;
9. Tenants cannot be penalised if they reduce opening hours or cease to trade during the pandemic; and
10. Parties will be forced to attend a mediation in the event that they cannot resolve the matter.
Rent Waivers and Deferrals
It has been proposed by cabinet that the Code will include a provision that Landlords must offer tenants proportionate reductions in their rent to their reduction in turnover as a result of the Covid-19 pandemic in the form of a waiver or deferral. Any amount that is waived cannot be subsequently claimed by the landlord. Any amount deferred will need to be paid back following the pandemic and a reasonable recovery period.
The government has proposed a Code that will interfere with the contractual rights that parties have agreed to. It is quite substantial to seek to impose that requirement, and we question how the legislation or Code will be framed to impose those rights on parties to a contract in the form of a lease that has been previously agreed.
The government has stated that any waivers or deferrals must be proportionate and may apply to up to 100% of the rent payable. For example, if a business experiences a 60% loss in turnover, then the reduction in rent, by waiver or deferral, must be at least 60%.
The government has advised that the waivers must constitute at least 50% of the reduction in rent, unless the tenant agrees to a lesser percentage. Using the example above, if a business experiences a 60% loss in turnover, then at least 30% of the rent must be waived. The remaining 30% may be deferred.
The Code is proposed to state that the landlord is not permitted to require fees, interest or other charges with respect to rent that has been waived or deferred.
Our team is keeping a close eye on all announcements from the government which could impact our clients and we will continue to keep you informed. It will be interesting to see how this legislation is proposed to be implemented.
What you should be doing now?
The framework for the proposed Code has now been set so both landlords and tenants should be negotiating in “good faith” to achieve the best possible negotiated settlement.
If you require assistance to negotiate and would prefer the clout of experienced commercial advisors and negotiators please feel free to reach out. Please also be sure to have any settlement reached documented properly. There is generally a lot of money at stake so to avoid a dispute in the future, please ensure that it is documented.
Feel free to phone one of experts today for an obligation free and confidential discussion.