Mandatory Code: Commercial & retail leases
On 7 April 2020, the Prime Minister announced the creation of a mandatory Code of Conduct (the Code) to apply to certain commercial and retail leases during the COVID-19 crisis. The Code is to be given effect through state and territory legislation or regulation.
The purpose of the Code is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between landlords and tenants. While the Code signifies the need to seek an appropriate balance between the interests of tenants and landlords, its principles are weighted heavily in favour of tenants, with landlords expected to shoulder most of the financial burden.
Who does the Code apply to?
The Code applies to commercial tenancies:
- Where the tenant is a small and medium enterprise (SME) (annual turnover of up to $50 million); and
- That are suffering financial stress or hardship due to COVID-19.
Financial stress or hardship is defined in the Code as a tenant’s inability to generate sufficient revenue to meet its financial or contractual commitments as a direct result of the COVID-19 pandemic. An SME tenant that is eligible for the federal government’s JobKeeper scheme is deemed to be suffering financial stress or hardship.
The annual turnover threshold of $50 million applies to franchises at the franchisee level. In respect of retail corporate groups, on the other hand, it will apply at the group level rather than the individual retail outlet level.
Mandatory minimum relief for tenants
It is intended that landlords will agree to tailor temporary and appropriate arrangements for each SME tenant taking into account their particular circumstances on a case-by-case basis.
In negotiating and enacting these arrangements, the following applies:
- A prohibition on termination of leases for non-payment of rent.
- Proportionate reductions in rent (see further information below) payable in the form of waivers and deferrals:
- Rental waivers: must constitute no less than 50% of the total reduction in rent payable and cannot be recovered by the landlord over the term of the lease. Importantly (although unlikely) tenants may agree to waive the requirement for a 50% minimum waiver.
- Rent deferrals: unless otherwise agreed, repayment of rent deferrals by the tenant must be amortised over the greater of the balance of the lease term and a period of no less than 24 months.
- No interest or other charges are to be applied to unpaid rent the subject of rent reductions.
- A freeze on rent increases.
- A prohibition on landlords from making a claim on a bank guarantee or a security deposit for non-payment of rent.
- In relation to other charges under the lease:
- Outgoings: The landlord must pass on any reduction in statutory charges (e.g. land tax or council rates) or insurance it received in the appropriate proportion applicable under the terms of the lease.
- Services: Landlords should consider waiving recovery of any other expenses payable during the period a tenant is not able to trade (e.g. charges for services – although in these circumstances, landlords can reduce the services provided under the terms of the lease).
- The landlord must share any benefit it receives for the deferral of loan payments from its bank in a proportionate manner with the tenant.
- A prohibition on penalties for tenants who stop trading or reduce opening hours.
- Tenants should be given the opportunity to extend its lease for an equivalent period of the rent waiver or deferral period.
Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. A material failure to abide by the substantive terms of their lease will forfeit any protections provided to the tenant under the Code.
What is a proportionate reduction in rent?
The amount of rent relief available to a tenant is to be proportionate to the reduction in trade that the tenant suffers as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period.
Tenants seeking rent relief will need to be able to demonstrate a reduction in turnover with specific regard to its revenue, expenses and profitability. Tenants must provide sufficient and accurate information to the landlord in the context of negotiations (and visa versa). Both parties must negotiate in good faith.
To ascertain the extent that the tenant’s turnover has been reduced (and therefore any proportionate reduction in rent) landlords should request the following from tenants (among other things and depending on the nature of the tenant’s business and the premises):
- Evidence of the tenant’s eligibility for the JobKeeper programme;
- Evidence the tenant has a turnover of less than $50 million;
- Comparative pre and post March 2020 statements of income, expenses, assets and liabilities (preferably audited or certified);
- Profit and loss statements and balance sheets;
- Evidence of any business interruption insurance;
- Details of any loan deferrals offered by the tenant’s financier.
Where landlords and tenants cannot reach agreement on the temporary leasing arrangements, the matter must be referred to the applicable state or territory “retail/commercial leasing dispute resolution body” for binding mediation.
Implementing and documenting changes
The Code acknowledges that all leases have different structures, periods of tenure and different mechanisms for determining rent. With this in mind, each lease must be dealt with on a case-by-case basis having regard to the nature of the lease and premises, the particular terms of the lease and the financial hardship suffered by the tenant.
Any agreement reached between the tenant and landlord under the Code (or otherwise) should be formally documented.
The above information is of general nature only and is based on the information available at the date of publication. It is not, nor is intended to be legal advice. The Code contains a number of complex mechanisms and requirements that require careful consideration in their application. Businesses and landlords should seek professional legal help to negotiate and document the terms of any arrangement implemented under the Code (or otherwise).
Ramsden Lawyers are advising landlords and tenants in relation to their rights and obligations during the COVID-19 outbreak. If you require any assistance or advice, please do not hesitate to get in touch with one of our lawyers from the commercial property team on 1300 749 709.