Vicki Aro, Counsel - [email protected], Pauline Tan, Partner - [email protected], Richard Brooks, Consultant - [email protected], Tegan Keizer, Lawyer - [email protected]
What you need to know
- Landlords and tenants have been eagerly awaiting guidance from Government on how to deal with their tenancy issues as a result of the COVID-19 crisis. Landlords have been delaying negotiations with their tenants pending the release of Government policy, in fear that they may act in a way that is unreasonable or that contradicts the Government position.
- A National Cabinet Mandatory Code of Conduct (the Code) was announced on 7 April 2020 and this has provided clarity for some tenancy arrangements.
- However, the Code only applies to small and medium sized tenants that have an annual turnover of up to $50 million and are eligible for the Commonwealth Government's JobKeeper programme (see our note here for further detail). It does not extend to the big end of town and it now seems clear that Government does not intend to prescribe how landlords should negotiate with their larger tenants.
- Nevertheless, Government has suggested that the principles underlying the Code should apply in spirit to all leasing arrangements (having fair regard to the size and financial structure of those businesses). This means that all landlords and tenants should keep the principles of proportionality and fairness front of mind. However, the consequences of not adhering to such principles where not mandatory, is yet to be determined. It will be interesting to see how this suggestion may change the legal framework and what will be considered reasonable or unreasonable conduct where there is no disparity in negotiating positions between the parties.
What you need to do
- If landlords and tenants have not done so already, they should start their discussions to negotiate appropriate temporary amendments to their leases, having regard to the principles of the Code.
- If the Code does not apply, landlords and tenants may want to bear in mind the principles outlined in the Code (or use it as a starting point if you are a tenant) but then progress negotiations having regard to the particular circumstances and financial strength of each party.
- In progressing negotiations, landlords and tenants should act in an open, honest and transparent manner and each should provide each other with as much information as possible to achieve outcomes that are favourable to each party.
The Code only applies to specific tenancies
The Code applies to small and medium sized tenants which have an annual turnover of up to $50 million and are eligible for the Commonwealth Government's JobKeeper programme (see our note here for further detail). Tenants may be eligible for the JobKeeper programme if they estimate their monthly or quarterly turnover has, or will, likely fall by 30% or more relative to their turnover in a corresponding period a year earlier.
The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).
What are the principles underlying the Code?
The objective of the Code is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, while seeking to appropriately balance the interests of tenants and landlords.
It is intended that parties will negotiate and agree a bespoke arrangement for each tenancy arrangement, taking the tenant's particular circumstances into account. For example, the extent of financial hardship suffered by the tenant as a result of COVID-19, whether the tenant's lease has expired or is close to expiry, or whether the tenant is in administration or receivership.
Parties are expected to negotiate in good faith and provide each other with sufficient information in order to negotiate outcomes consistent with the Code.
Leasing principles under the Code
The Code states that parties should apply the following principles when negotiating temporary lease arrangements:
- landlords won't have the right to terminate leases for non-payment of rent during the COVID-19 pandemic period (or a reasonable subsequent recovery period);
- tenants will need to continue to comply with the terms of their lease, subject to any negotiated amendments with their landlord;
- rent reductions should be proportionate, payable in the form of waivers and deferrals of up to 100% of the amount of rent that would normally be paid. The amount of reduction should be assessed on a case-by-case basis, based on the reduction in the tenant's trade;
- at least 50% of the total rent reduction should be in the form of a rent waiver (unless the tenant waives such a requirement). Having regard to the landlord's financial ability to provide additional waivers, rent waivers could be greater where failing to waive rent would prevent the tenant from continuing to fulfil their ongoing obligations under the lease. By way of example, if a tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief should be rent reduction and the other 50% a rent deferral;
- tenants must be allowed to gradually pay off the deferred rent over the greater of either the balance of the lease term or over no less than 24 months, unless the tenant and landlord agree otherwise;
- if the landlord receives any reduction in statutory charges, such as land tax or council rates, or insurance, this reduction is to be passed on to the tenant in the appropriate proportion applicable under the lease. Land tax waivers have been announced in Queensland and Tasmania, and in states such as New South Wales, extensions to deadlines for payments and leniency for late payments have been granted;
- any benefits received by landlords due to deferral of loan payments should be shared with the tenant in a proportionate manner;
- landlords should seek to waive the recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade;
- all repayments should occur over an extended period and no repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, taking into account a reasonable subsequent recovery period;
- no fees, interest or other charges should be applied to rent waived and no fees, charges or interest may be charged on rent deferrals;
- landlords won't have the right to draw on a tenant’s security (such as bond, bank guarantee or personal guarantee) for the non-payment of rent during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period;
- the tenant should be provided with an opportunity to extend the lease for an equivalent period of the rent waiver and/or rent deferral period. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes;
- landlords agree to freeze rent increases during the COVID-19 pandemic period and a reasonable subsequent recovery period, except for retail leases based on turnover rent; and
- landlords won't have the right to apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
What happens if parties cannot reach agreement?
Where landlords and tenants cannot reach agreement on temporary lease arrangements that embody the principles of the Code, either party may refer the matter to applicable state or territory retail or commercial leasing dispute resolution processes for binding mediation (which includes the Small Business Commissioners or Ombudsmen where applicable).
Landlords and tenants may not use mediation processes to prolong or frustrate outcomes.
What should parties do if the Code does not apply?
Although the Code only applies to specific tenants, there is reference to the principles underlying the Code applying in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.
This means that landlords and tenants (for which the Code does not apply) should continue to adopt Government's original advice – talk to each other and try to agree a commercially agreeable outcome having regard to the specific circumstances of each party and the specific terms of the lease. The Code provides a good framework to start those discussions.
What comes next?
The Code will be given effect through state and territory legislation or regulation, as appropriate, and will remain in place while the Commonwealth Government JobKeeper programme is operational.
Although no timing has been provided, it is expected that states and territories will pass legislation or regulations to give effect to the Code quickly. Some states have already passed emergency measures legislation giving Ministers power to make regulations under existing acts, such as the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 in NSW which allows the Minister to recommend regulations amending legislation governing retail (and perhaps commercial) leases.
National Cabinet has noted that it expects Australian and foreign banks, along with other financial institutions operating in Australia, to support landlords and tenants with appropriate flexibility as they work to implement the mandatory Code. Further, the Commonwealth Government is acting as a model landlord by waiving rents for all of its small and medium enterprises and not-for-profit tenants within its owned and leased property across Australia.
We will provide a further update once legislation is passed that gives further guidance on commercial tenancy issues.
If you would like to discuss the implications of these updates in relation to your commercial tenancy, please do not hesitate to contact us.
If you would like to read more of our legal updates and stay up to date on developments relating to COVID-19 you can click here.
Thank you to © Ashurst 2020 for letting us reproduce this article.
This article was first published on www.ashurst.com titled COVID-19 and commercial tenancies - future directions? dated 9 April 2020.
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