COVID-19: Commercial Tenancies Code – The Pathway Forward
By Scott McKenzie, Emma Milne and Andrew Henshaw, Velocity Legal
This is a challenging time.
Many businesses have closed or are feeling extreme pressure, which invariably creates headaches for both landlords and tenants. However, the announcement of the commercial tenancies code of conduct on 7 April 2020 (Code) provides some clarity on the pathway forward.
Does it apply to me?
The Code will be given effect through relevant State and territory legislation or regulation. The precise form of that legislation in each State remains to be seen. Broadly, the Code will apply throughout Australia to commercial leases where the tenant:
- is eligible for the JobKeeper program;
- is in a position of financial distress; and
- has a turnover of $50 million or less per annum.
It is also worth noting that while landlords and tenants will only bound by the Code in the above situations, the Code also contains a ‘call to arms’ of sorts for landlords of large commercial tenancies. Somewhat obscurely, the Code provides that “The Parties to this Code concur that during the COVID-19 pandemic period… the principles of this Code should nevertheless apply in spirit to all leasing arrangements for affected businesses”, however declines to define who exactly ‘The Parties’ to the Code are.
The Code provides that landlords and tenants should negotiate and enact appropriate arrangements as soon as possible in accordance with the following core leasing principles:
- landlords must not terminate a lease due to non-payment of rent during the pandemic period, or reasonable subsequent recovery period;
- tenants must remain committed to the terms of their lease, subject to any temporary arrangements negotiated with their landlords, and failure to uphold key terms of their lease will forfeit their protection under the Code;
- landlords must offer tenants proportionate rent reductions in the form of waivers and deferrals (such as deferral/reductions of payments and pausing or hibernating the lease), based on the reduction in the particular tenant’s trade during the pandemic. Importantly, the Code provides that any amount of reduction provided by a waiver must not be recouped by the landlord over the term of the lease;
- at least 50% of the total reduction in rent payable by a tenant during the pandemic period must be in the form of rental waivers, and should constitute a greater proportion in cases where failure to do so would compromise the tenant’s capacity to fulfill their ongoing lease obligations. Tenants must also consider the landlord’s financial ability to provide these additional waivers, and may waive the 50% requirement by agreement;
- if the parties agree to rental deferrals, and unless otherwise agreed by the parties, payments of deferred amounts must be amortised over the greater of:
- the remaining lease term; or
- 24 months;
- landlords must pass to the tenant any reductions in statutory charges (e.g. land tax and council rates), in an appropriate proportion with regards to the terms of the lease;
- if a financial institution provides a benefit to the landlord (e.g. deferral of loan payments), the landlord should seek to share the benefit with the tenant;
- landlords should seek to waive recovery of expenses and outgoings from tenants during periods in which a tenant is unable to trade due to the pandemic. However, in such circumstances landlords will also reserve the right to reduce services as required;
- if a party will be required to make repayments under a temporary arrangement, the repayments should:
- occur over an extended period so as to avoid placing additional financial burden on the tenant; and
- not commence until either:
- the pandemic ends; or
- the existing lease expires (taking into account a reasonable subsequent recovery period);
- landlords should not apply any fees, interest, charges, or punitive interest to any waiver or deferral of rent;
- during the pandemic period, and a reasonable recovery period afterwards, landlords must not draw on any security provided by a tenant – whether in the form of a cash bond, bank guarantee or personal guarantee;
- if the parties agree to a rent waiver and/or deferral period, the tenant should be provided with an opportunity to extend the lease for an equivalent period to provide additional time to trade during the recovery period after the pandemic concludes;
- landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the pandemic and a reasonable recovery period, unless otherwise agreed between the parties;
- and during the pandemic, landlords must not levy any penalties against a tenant that reduces their opening hours or ceases to trade, and must not take steps to prevent the tenant from doing so.
How long will it apply?
The Code is intended to operate for the period that the Commonwealth JobKeeper program remains operational.
The Code will bring together a combination of good faith, commercial leasing negotiations and, where required, will be overseen through a binding mediation process. What this is likely to mean for commercial tenancies is that landlords and tenants will need to proactively open the dialogue with one another to determine an appropriate rental reduction based on the tenants available figures, as well as agreeing to the percentage of rent that is waived and that which is deferred over the balance of the tenancy.
The Code requires a case-by-case assessment, considering factors such as:
- the unique rent mechanisms in the relevant lease (e.g. how rent is calculated);
- whether the tenant has suffered financial hardship due to the pandemic;
- whether the tenant’s lease has expired, or is soon to expire; and
- whether the tenant is in external administration (e.g. administration or receivership).
No matter the agreement, and no matter the relationship between the parties, we recommend that the outcome of those discussions be properly documented to avoid commercial disputes arising after the pandemic
Landlords and tenants are in an unprecedented position. The Code requires both parties to negotiate tailored arrangements which address the impact of the pandemic. These negotiations should be handled with care to ensure that this unique opportunity is used appropriately.
Scott is as sharp as they come. He guides his clients with precision and has an unrivalled hunger to find practical solutions to complex legal issues. Scott has been recognised as a leading commercial lawyer in Australia, and prides himself on tenaciously protecting his clients. If you want clear advice and exceptional outcomes, Scott is your man.
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Emma is a gun at property law. She is relentless and meticulous in finding solutions for her clients. Whether developer, landlord, tenant or investor, she gets the job done. You’ll also be in good company if you’re a Melbourne Storm, Renegades or Pies fan.
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Andrew specialises in difficult tax disputes and complex tax advice. He is passionate about getting wins for his clients, solving difficult legal issues and giving clear practical advice.
Andrew acts for a diverse range of private businesses, high net-wealth individuals and family groups. Andrew has been a Director of Velocity Legal since the firm was founded in 2016, and established Velocity Legal’s Sydney practice in 2019.