On Tuesday, 7 April 2020 the Prime Minister announced that a mandatory code of conduct for commercial and retail leases would be legislated in each state and territory to assist Landlords and Tenants as they navigate the impacts of the COVID-19 crisis. The Prime Minister indicated the objective of the code is to ensure parties share the financial impact of the crisis, while balancing the interests of Landlords and Tenants.
The code will require parties with eligible commercial or retail leases to negotiate amendments to their lease agreement in good faith, with a view to honour the lease throughout the current pandemic and beyond. Where Landlords and Tenants cannot reach agreement, either party may refer the matter to a binding mediation process.
The code will apply where a Tenant is:
1. a small to medium sized business (with an annual turnover of less than $50 million); and
2. suffering financial stress or hardship as a result of COVID-19 – this will be assessed based on eligibility to receive federal government support from the JobKeeper program (ie must have experienced at least a 30% decrease in revenue as a result of the COVID-19 crisis).
While the code is not mandatory for all tenancies, the government encourages all Landlords to consider applying the code to all businesses that have been affected by the global pandemic.
In summary, the code requires that Landlords and Tenants apply the following principles when negotiating arrangements:
1. Landlords must not terminate a lease on the basis of non-payment of rent during the COVID-19 period (or a reasonable recovery period);
2. Tenants must continue to honour the terms of their lease, subject to any subsequent amendments the parties may negotiate;
3. Landlords and Tenants will be required to work together towards a mutually satisfactory resolution that safeguards the continued operation of businesses beyond the COVID-19 crisis;
4. parties must act in an open, honest and transparent manner – this means that Tenants will be required to provide substantive financial information to demonstrate a reduction in business turnover;
5. Landlords must offer a proportionate reduction in the rent payable by the Tenant based on the reduction in the Tenant’s turnover during the COVID-19 crisis and a subsequent, reasonable recovery period;
6. the rental reduction may be by a combination of rental waivers and deferrals:
(a) at least 50% of the total rent reduction must be by a waiver of rental (with the balance being by way of deferred rent) (i.e. if the parties negotiate a 30% reduction in the rent, at least 15% of that rent reduction must be waived entirely and the remaining 15% may be deferred for repayment at a later date);
(b) in circumstances where a 50% waiver would compromise the Tenant’s ability to comply with the Lease, a Landlord may be required to waive more than 50% of the rental reduction;
(c) the minimum 50% waiver requirement may only be waived with the Tenants agreement; and
(d) rental deferrals must be repaid over the balance of the remaining lease term or across a 24 month period, whichever is greater, unless agreed otherwise by the parties;
7. where appropriate, Landlords are encouraged to waive the recovery of outgoings or any other expenses payable under the lease while the Tenant cannot trade;
8. repayment of any amounts owing to the Landlord should be repaid over an extended period of time and should take into consideration the Tenant’s financial situation so as to avoid placing them under any undue financial pressure. Further repayments should not commence until the COVID-19 crisis has ended;
9. Landlords must not charge fees or interest on any unpaid, waived or deferred rent;
10. Landlords must not draw on the Tenant’s security to remedy any unpaid rent during the crisis;
11. Landlords should offer an extension to the term of the lease for the period equal to the rent waiver/deferral period, such that Tenants receive additional time to trade on the existing lease terms during the pandemic and recovery period;
12. Landlords must freeze all rental increases contemplated by their lease agreements (save for retail leases based on turnover rent) for the duration of the pandemic and a reasonable recovery period;
13. where parties cannot reach an agreement on the terms of the lease during the crisis, the matter will be referred to the relevant state or territory leasing dispute resolution process. In Victoria, this will be the Small Business Commission;
14. all leases will ultimately be dealt with on a case by case basis.
In essence, the value of relief afforded to Tenants negotiating under the code will be tied to the financial distress they are experiencing. This means that each participating lease will result in a bespoke, tailored approach to the crisis.
We recommend that all parties to commercial and retail leases obtain specialised, comprehensive advice regarding their agreement and the application of the code to their individual circumstances. All negotiated relief arrangements should be properly documented in order to protect both parties’ interests during the pandemic and the recovery period.
As noted above, each state and territory will be legislating to bring the mandatory code of conduct into effect. Naturally, there will be some variation in the above and greater detail will be need to be provided regarding the processes and procedures. The estimated time for completion of this legislative process is yet to be confirmed.
If you need help negotiating under your lease, interpreting the mandatory code or documenting your negotiated amendments, contact our Corporate & Commercial team today.