Following on from our previous article regarding leasing rights and obligations during the current COVID-19 pandemic (COVID-19), there have been further developments announced by the Federal Government. If you are after a definitive answer, we’re not quite there yet, but we are getting closer. Code
On 29 March 2020, the States and Territories announced a move to place a moratorium on evictions resulting from financial distress caused by the COVID-19 economic downturn. This moratorium will last for the next 6 months. On Tuesday 7 April 2020, the Federal Government introduced the National Cabinet Mandatory Code of Conduct (“the Code”). The Code relates to commercial leasing principles involving small and medium enterprise businesses (SMEs) with turnovers less than $50 million during COVID-19.
The Code relies heavily upon parties to act in good faith. The term “act in good faith” is an often-used drafting technique to cover all unknown outcomes where parties agree to act in good faith to deal with them as and when they arise. The Code is one of those cases.
Before landlords and tenants get too excited about utilising the Code to their benefit, you must determine whether the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper program.
The purpose of the Code is to aid the management of cash flow for SME tenants and landlords on a proportionate basis. The Code applies to all tenancies with an annual turnover of $50 million or less that are suffering financial stress or hardship as a result of COVID-19. While the Code applies to those businesses eligible to the benefits of the JobKeeper program, the Parties to the Code hope that it will “apply in spirit” to all leasing arrangements for affected businesses having regard to the size and financial structure of those businesses. While it is proposed that relevant State legislation will give effect to the Code, the Code will not supersede the State legislation.
The Code endeavours to share a proportionate and measured financial risk and cash flow procedure between landlords and tenants during COVID-19. This process will attempt to balance the interests of tenants and landlords.
Importantly, landlords and tenants will need to agree to tailor appropriate temporary arrangements for each SME taking into account the circumstances on a case by case basis. There is no “one size fits all” solution.
In our previous alert, we encouraged parties to talk to each other. It is now even more prevalent that landlords and tenants work together to facilitate business continuity and, where possible, a resumption of normal trading activities. Landlords and tenants must discuss the relevant issues and negotiate a temporary leasing arrangement that may include documentation in the form of a lease variation or deed poll arrangement. As all premises are different and the commercial arrangements affecting them vary, it is not possible for a single industry position. Parties will also be required to work within the legal constraints and spirit of the Competition and Consumer Act 2010.
LEASING PRINCIPLES TO BE CONSIDERED
The Code expects parties to apply the following principles as soon as possible on a case by case basis:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 period.
- Tenants must remain committed to the terms of their lease. Any material failure to abide by the substantive terms of the lease, will forfeit any protections provided under the Code.
- Landlords must offer tenants a proportionate reduction in rent which is payable in the form of a “waiver” and “deferrals”. This can be up to 100% of the amount ordinarily payable which will be based on the reduction of the tenant’s trade during and any subsequent recovery period.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable under the landlord’s proportionate rent reduction. Regard must be given to the landlord’s financial ability to provide additional waivers.
- The rental deferrals afforded to the tenant must be amortised over the balance of the lease and for a period of no less than 24 months (whichever is greater) unless agreed to by the parties.
- Any reduction in statutory charges, such as land tax or council rates will be passed onto the tenant in an appropriate proportion.
- The landlord should seek to share any benefits that it receives due to the deferral of loan payments.
- Where appropriate, the landlord should waive the recovery of any other expense or outgoing ordinarily payable by a tenant during any period that the tenant is unable to trade. Consequently, the landlord may reduce the services as required in such circumstances.
- Any negotiated arrangements under the Code requiring repayment should occur over an extended period in order to avoid placing the tenant under financial burden.
- No fees, interest or other charges should be applied to any rent waived.
- A landlord must not claim the tenant’s security for non-payment of rent.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver or deferral period.
- Landlords agree to freeze any rent increases (except for retail leases based on turnover rent).
- Landlords may not apply any prohibition on levies and penalties if a tenant reduces its opening hours or ceases to trade.
WHERE TO FROM HERE
Landlords can either wait to see what the Victorian Government does before making any agreements with their tenants or make those agreements subject to any further legislative developments.
In the interim, landlords may wish to take the following steps:
- Determine whether the Code may apply to their tenant.
- Delay any action against the tenant for unpaid rent.
- Consider how rental relief will affect their ability to fund any loan(s) they may have.
- Determine what costs or expenses they can waive to assist their tenant.
- Commence discussions with their tenant about their current situation and what the landlord’s current losses and overheads are.
- Suggest their tenant document their current finances and eligibility for the JobKeeper programme.
Similar to landlords, tenants should either wait to see what the Victorian Government does before making any agreements with their landlords, or make any agreements subject to any further legislative developments.
In the interim, tenants may wish to take the following steps:
- Determine whether the Code applies to their business.
- Consider if there are any benefits in negotiating an extension of your lease with a rent reduction, or whether you will vacate the premises when the lease expires.
- Prepare the relevant financial information to demonstrate any loss of turnover and your eligibility for the JobKeeper programme.
- Open discussion with your landlord.
Where landlords and tenants cannot reach an agreement on these leasing arrangements, the matter will be referred to the applicable State of Territory retail/commercial leasing dispute resolution processes.
TenantCo Pty Ltd (TenantCo) has suffered financial hardship as a result of COVID-19 and approaches its landlord for relief under the Code. TenantCo qualifies under the JobKeeper Program.
TenantCo has experienced a 30% loss of turnover.
Under the Code, TenantCo is guaranteed 30% cash flow relief from the landlord. The relief will take the form of at least 50% rent waiver in the proportion of the tenant’s revenue reduction. Up to half could be through the deferral of rent over a minimum 24 month period.
Our understanding of what this means for both parties?
- TenantCo pays $120,000 rent per annum or $10,000 per month.
- It has suffered a 30% downturn.
- It will now pay $7,000 per month ($3000/30% less).
- $1500 per month will be waived as rent abatement – this will not be recouped by the landlord; and.
- $1500 per month will be deferred over the next 24 months.
Rigby Cooke is already working with several landlords and tenants who are working in good faith to facilitate a resolution to current leasing dilemmas. As we gain a further understanding of the operation of the Code, we will update you.
As always, we hope that you are healthy and safe and surviving these unique times.
For further advice or discussion please contact our Property team.
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