COVID-19 - New Mandatory Commercial Tenancy Code… What it means for you!

The PM addressed the nation once again on Tuesday, 7 April, 2020. This time with his focus on Commercial Leases (including Retail, Office and Industrial Leases).

The Federal Government has prepared a Code called the “National Cabinet Mandatory Code of Conduct” which comes into effect in all States and Territories as of 3 April, 2020 and will remain in place for such time as the Commonwealth JobKeeper programme remains operational.

“The objective of the Code 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.”

Under the new mandatory Code, which will be legislated and regulated in each State and Territory of Australia, both the Landlord and Tenant will have new rights and obligations to abide by provided that the Tenant is an ‘eligible business’. We are yet to see the actual Queensland legislation to implement this new Federal Code.

The Code will apply to any Leasing arrangement where the Tenant is eligible for the “JobKeeper” programme. It is designed to apply only to those businesses in distress and where they have a turnover of $50 million or less. Therefore, the Code is designed to support small and medium sized enterprises and introduces “good faith” leasing principles for both Landlords and Tenants to abide by.

The usual rights of Landlords and Tenants (that are governed by written Leases and other state legislation such as the Property Law Act and Retail Shop Leases Act in Queensland) have been altered for those that qualify to have the “Code's” protections which are briefly summarized as follows: 

For the Landlords

  • A Landlord must not terminate a Lease or draw on the Tenant’s security (rental bond/bank guarantee) due to non-payment of rent during the COVID-19 pandemic or a reasonable period thereafter (referred to as “the subsequent recovery period”);

  • A Landlord must offer its Tenant a proportionate reduction in rent payable in the form of ‘waivers’ and ‘deferrals’ of up to 100% 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:

    • Waivers of rent must account for at least 50% of the reduction in rental provided to the Tenant during that period and should be the larger portion of the total reduction in rent (provided that the Landlord has the financial ability to provide such waivers). Tenants may waive the requirement for a minimum of 50% rent waiver by agreement;

    • Deferrals must be amortised over the balance of the Lease term or for a period of no less than 24 months (whichever is the greater) unless otherwise agreed in writing. Such deferrals in rent payable should not have fees, interest or other charges applied.

Example: If a Business that qualifies for the JobKeeper programme has suffered a 100% loss in turnover (ie. as it has been forced to close during the COVID-19 pandemic), then the Tenant may be entitled to at least a 50% waiver of the rent payable during this period, with the remaining 50% of the rent deferred and not repayable to the Landlord until after the pandemic has passed and in which case will be repayable over at least a 24 month period.

If the Tenant’s rent per month is $5,000.00, for those months that it is affected by the pandemic, $2,500.00 per month is waived and the remaining $2,500.00 per month is repayable to the Landlord at a later date (when the pandemic has passed).

If the business is closed for 3 months and the Tenant owes the Landlord $7,500.00 in deferred rent, then the repayment formula would look to be as follows:

$7,500.00 / 24 months = $312.50 per month (which would be an additional amount of rent on top of the usual rent of $5,000.00 per month payable by the Tenant when the pandemic period has passed).

If the Lease is for a longer term than 24 months, then the Tenant is able to amortise the payment over the remainder of the term.

Example: If the Lease term has 5 years to go once the pandemic is over, then the $7,500.00 in deferred payments would be repayable by the Tenant to the Landlord over a 60-month period making the deferred payments $125.00 per month.

 

  • Any reductions in statutory charges (ie. rates, land tax) or insurance should be passed onto the Tenant if they contribute towards these outgoings;

  • A Landlord should waive recovery of any other expense (including outgoings) payable by the Tenant where the Tenant is not able to open for trade;

  • Landlords are to freeze any rent increases (except for Retail Leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period;

  • Landlords cannot impose any penalties or prohibit a Tenant from reducing its opening hours or ceasing to trade due to the COVID-19 pandemic;

  • For any repayments or deferrals made, these should occur over an extended period in order to avoid placing undue financial burden on the Tenant 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 and taking into account a reasonable subsequent recovery period;

  • The Tenant should be provided an opportunity to extend their Lease for an equivalent period of the rent waiver and/or deferral period so that they have additional time to trade, on the existing Lease terms, during the recovery period.

For the Tenants

The Tenant must honour the Lease (ie. comply with all the Lease terms unless varied by the mandatory Code). If the Tenant does not comply with the Lease, then they lose their protections afforded under the Code.

Where to from here?

The PM reiterates his prior message for “all Landlords and Tenants to sit down and work it out”. Accordingly, it is encouraged that both Landlords and Tenants should maintain open communication and co-operation with each other relating to their Leasing arrangements including when discussing any rent relief arrangements that are consistent with the Code.

In order to assist negotiations, a Tenant should be providing evidence to a Landlord to show they qualify for the JobKeeper programme and provide historical financials to be able to show the previous trading history of that business. It may also be prudent for a Landlord to obtain further information on the business owners’ financial situation to make an informed decision of the rent relief they should be granting to that Tenant.

Under the Code there are requirements for all Landlords and Tenants that cannot reach an agreement on their leasing arrangements (as a direct result of the COVID-19 pandemic), to refer the matter to the States commercial leasing dispute resolution process or to mediation.

Banks are expected to provide the same levels of support and co-operation to those Landlords as has been previously given to other property owners, to assist the Landlord to preserve the Lease arrangement with the Tenant and to keep the Tenant in the property.

We need to see the actual Queensland legislation before we can provide further details in relation to these changes.

It is vital that any agreement be documented to avoid later disputes. We can assist both Landlords and Tenants to appropriately document any variations or arrangements pursuant to the Code.

The content of this newsletter is to provide a general guide on this topic. Professional advice should be sought about your specific circumstances.

If you have any queries in relation to the above or require assistance with negotiating your Lease terms with either your Landlord or Tenant for your commercial premises, please contact our office and one of our experienced commercial lawyers will be able to assist.

EmploymentFiona Hollingworth