Commercial Leases and COVID
On 7 April 2020, the national cabinet announced a Mandatory Code of Conduct that would apply to commercial leases where the tenant is a small or medium-sized business which has been financially impacted by the COVID-19 pandemic. The Code imposes good faith leasing principles that are set to reshape relations between landlords and commercial tenants during the period of the pandemic and for a recovery period after the crisis is over. The states and territories are expected to pass legislation to implement the Code commencing at a time to be determined by each jurisdiction. This article sets out the changes to commercial leasing arrangements required under the Code.
How long will the Code of Conduct apply?
The principles of the Code of Conduct will be required to be followed for as long as the JobKeeper program is operational.
Who does the Code apply to?
The Code of Conduct applies to retail, office and industrial tenants which are a small or medium enterprise with an annual turnover of less than $50 million and which are suffering financial distress and hardship.
Tenants that are eligible for the JobKeeper program are automatically eligible for the benefits conferred by the Code of Conduct. Businesses with an annual turnover of less than $1 Billion that have experienced a 30% fall in revenue since 1 March 2020 are eligible, provided they are not subject to the major bank levy.
The Code of Conduct is also intended to provide guidance for dealing with all business affected by COVID-19, even those that it does not strictly apply to.
Obligations under commercial leases
Tenants should remain committed to the terms of their tenancies subject to any changes negotiated under the Code. Where a tenant fails to abide by the terms of their lease, they forfeit the protection provided under the Code.
Opportunity to extend commercial leases
Tenants should be allowed to extend the period of their lease for the period of the rent waiver/deferral period so as to allow the tenant the opportunity to continue trading on existing terms during the recovery period.
Rent reductions, waivers and deferrals
Landlords must offer rental reductions in the form of waivers (ie the rent owed is written off) and deferrals (ie the rent is to be paid at a later date) of up to 100% of the amount ordinarily payable. The rental reduction is to be calculated based on the reduction in the tenant’s trade during the COVID period and for a reasonable recovery period afterwards.
Rental waivers must constitute at least half of the total reduction in the amount of rent payable and more in cases where failure to waive rental arrears would compromise the tenant’s ability to fulfil their obligations under the lease. The landlord’s financial capacity to offer a waiver must also be considered.
Tenants must be allowed to pay deferred rent over the balance of the lease term or over a period of 24 months, whichever is greater, unless otherwise agreed. In other words, the tenant may end up continuing to pay back deferred rent after the expiry of the lease.
The government has imposed a freeze on rental increases on commercial leases to which the Code applies for the period of COVID-19 and for a reasonable recovery period afterwards, notwithstanding any prior arrangements between the landlord and the tenant.
Waiving of expenses
The Code requires that where appropriate, landlords should waive recovery of expenses during the period a tenant is unable to trade. Landlords may reduce services during this period.
Landlords must not impose any fees or interest on rental payments deferred or waived.
The Code of Conduct states that landlords must not terminate commercial leases for non-payment of rent during the COVID-19 period.
Landlords are not allowed to draw on a tenant’s security (such as a bond) to cover unpaid rent during the COVID-19 period.
Reduced opening hours
Landlords must not penalise tenants which reduce opening hours or stop trading because of COVID-19.
Case by case basis
All leases must be dealt with on a case by case basis, taking into account whether the tenant has suffered COVID-19 related financial hardship, whether the lease is soon to expire and whether the business is in administration or receivership. In arriving at temporary arrangements, parties must also take into account whether leases are already in arrears and what the structures, periods of tenure and mechanisms for determining rent under the lease are.
When a landlord and a tenant cannot come to a satisfactory temporary agreement under the Code, the matter should be referred to the applicable state or territory dispute resolution process for binding mediation. Mediation processes must not be used to prolong or frustrate the negotiation process.
An Industry Code Administration Committee will be set up in each state and territory to promote and monitor the operation of the Code. When individual jurisdictions pass legislation incorporating the Code of Conduct into their laws, more information will be available as to exactly how the rights and duties of commercial landlords and tenants will be affected in that state or territory.
If you require legal advice or representation in any legal matter, please contact Go To Court Lawyers.