The economic impact of COVID-19 on business generally, and commercial leasing arrangements has been the focus of many landlords, tenants and governments.
On 7 April 2020, the Federal Government released its much-anticipated Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (the Code).
The Code adopts and builds on principles emanating from National Cabinet Meeting discussions concerning commercial tenancies and is to be implemented by states and territories through legislation or regulation. It imposes a set of leasing principles to apply to commercial tenancies (retail, office and industrial) between owners / operators / other landlords and tenants, in circumstances where the tenant is an eligible business – a small-medium sized business (with annual turnover of up to $50 million) that, due to financial stress as a result of the COVID-19 pandemic is eligible for the Commonwealth Government’s JobKeeper programme.
For a franchise, the $50 million threshold applies at the franchisee level, and for retail corporate groups, the threshold applies at the group level.
The Code is intended to apply for the period during which the Commonwealth JobKeeper program remains operational.
What are the objectives of the Code?
The Code’s purpose is ‘to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period whilst seeking to appropriately balance the interests of tenants and landlords.’
The mutual benefit of landlords and tenants implementing measures to foster business continuity is acknowledged, and it is anticipated they will negotiate transparently and in good faith to reach tailored solutions.
Agreed outcomes should consider the financial impact of the COVID-19 pandemic on the tenant (its revenue, expenses and profitability) with appropriate arrangements having regard to the present impact and a reasonable recovery period.
Effectively, the Code enables eligible commercial tenants to receive rent relief in the form of waivers or deferrals (proportionate to trading reduction of their business) to help them survive the pandemic and beyond.
What are the Leasing Principles?
The Code’s Leasing Principles should be applied, on a case-by-case basis, when negotiating temporary arrangements. Key principles include:
- Landlords are prohibited from terminating leases for non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- Subject to negotiated amendments, tenants must otherwise commit to and fulfill the substantive terms of the lease. Failure to do so will forfeit protection under the Code.
- Landlords must offer proportionate rent reductions in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, based on the reduction in tenant’s trade during the COVID-19 pandemic period and subsequent reasonable recovery period.
- A rental waiver must be no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period, or greater in cases where the tenant’s capacity to fulfill their obligations under the lease would otherwise be compromised. The landlord’s financial ability to provide such additional waivers must be taken into consideration.
- Unless otherwise agreed, payment of deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater.
- Landlords may not apply fees, interest or other charges with respect to rent waivers and deferrals.
- Reductions in statutory charges (land tax, council rates) or insurance should be passed onto tenants reflective of how these are proportioned in the lease.
- Landlords are prohibited from calling in a bank guarantee, personal guarantee or security deposit for non-payment of rent during the COVID-19 pandemic period and / or a reasonable subsequent recovery period.
- Apart for retail leases based on turnover rent, rental increases are to be frozen for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.
- Tenants should be provided an opportunity to extend a lease for the equivalent period of a rent waiver and / or deferral period.
- Where agreement cannot be reached, matters should be referred, and subject to, relevant state and territory resolution processes.
What should tenants and landlords do?
Tenants and landlords are commercially reliant on each other and should negotiate in good faith to reach practical solutions that will sustain both, not only during the pandemic, but into the future. Many negotiations will be challenging and complex.
Negotiations should consider:
- the Mandatory Code of Conduct and relevant state / territory legislation and regulations;
- the terms of the current leasing arrangements, including headlease / sublease arrangements which will add complexity to the negotiations;
- Government financial assistance such as Commonwealth Government JobKeeper assistance for eligible tenants;
- any loan repayment holidays provided by lending institutions to the landlord;
- the documentation required to show actual losses / decreases in turnover suffered by a tenant due to COVID-19 (bank statements, accounting records);
- realistic timeframes for recovery with possible extensions to moratorium periods;
- any variations / extensions to the term of the lease.
Negotiations can be facilitated with the assistance of a commercial lawyer and agreed variations documented in writing and, where relevant, registered on the title of the leased premises.
As the present crisis continues to evolve, so too do the measures to address the numerous economic challenges faced. It is yet to be seen how the states and territories will incorporate the Code into their various laws and regulations.
In preparation for the implementation of these measures, New South Wales has enacted the COVID-10 Legislation Amendment (Emergency Measures) Act 2020 (NSW) to allow regulations to be made under key Acts such as the Retail Leases Act 1994 (NSW). It is likely that other states and territories have already or will introduce similar laws.
We are here to assist throughout these difficult times and encourage tenants and landlords financially impacted by the coronavirus to contact us for independent tailored advice and assistance.