On Tuesday 7 April, the Federal Government released another announcement in response to COVID-19, the Commercial Tenancies Code of Conduct. The Code establishes a mandatory framework for the landlords and tenants of SME businesses impacted by COVID-19.
The principles of the Code are that landlords and tenants must negotiate in good faith to share the burden of surviving the pandemic and in order to resume normal business when the crisis ends. Given there is a vast array of circumstances that apply to commercial leasing arrangements and that the governing law is generally applied at a state level, a one size fits all approach is impossible to mandate. As a result, a set of basic principles have been outlined which will form the basis of any negotiation.
Applications of the principles on tenants include:
- Eligibility requires a level of financial hardship resulting from the impact of the COVID-19 pandemic.
- SME tenants who are eligible for the Federal Government JobKeeper program will be automatically available.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had for the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
- If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring and taking into account a reasonable subsequent recovery period.
- No fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferrals in principles described above.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined above. 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.
Applications of the principles on landlords include:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% and no less than 50% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other landlords, with the tenant in a proportionate manner.
- Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as require in such circumstances.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
- Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
In the event of a dispute, a binding mediation process is to be conducted by each state or territory’s small business ombudsman. Any agreed arrangements will consider the impact of the COVID-19 pandemic on the tenant, with specific regard to the tenant’s revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period.
William Buck encourages landlords and tenants to work together to obtain commercially viable outcomes, but as with all COVID-19 measures there are some unknown consequences of the application of the principles. While the broad principles of landlords and tenants working together is admirable, assessing the level of financial hardship on landlords and the benefits of any relief provided to landlords will differ depending on the circumstance. Where agreement cannot be reached in relation to commercial leases, we remain committed to helping our clients obtainlthe outcome that will allow their commercial tenancies to continue post COVID-19.