The National Cabinet has published the mandatory Code of Conduct (Code) imposing various leasing principles to be applied by Landlords and Tenants during commercial lease negotiations amid the COVID-19 pandemic.
The Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic, where the tenant is eligible for the JobKeeper programme and has an annual turnover of up to $50 million.
The turnover threshold will be applied to franchises at the franchisee level and in respect of retail corporate groups at the group level (rather than the retail outlet level).
However, while not mandatory for tenancies which do not meet the JobKeeper eligibility and turnover criteria, landlords are encouraged to apply the Code to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.
We anticipate that the Code will come into effect in Queensland shortly in order to implement a national approach to commercial leases.
In terms of Franchises and Retail Corporate Groups, the $50 million annual turnover threshold will be applied as follows:
• Franchises: at the franchisee level; and
• Retail Corporate Groups: at the group level.
What are the principles of the Code of Conduct for Landlords & Tenants during The Coronavirus pandemic?
The key principles set out in the Code include:
• landlords and tenants share a common interest to preserve the lease and facilitate the resumption of normal trading activities;
• landlords and tenants are required to negotiate and work towards achieving mutually satisfactory outcomes and negotiate in good faith;
• landlords and tenants will act in an open, honest and transparent manner and provide sufficient and accurate information to enable the parties to reach agreement consistent with the Code;
• the arrangements must be proportionate to the impact of the COVID-19 (coronavirus) pandemic on the tenant;
• landlords and tenants will assist each other in their respective dealings with other relevant third parties such as government, utilities and financiers in order to achieve outcomes consistent with the Code;
• landlords must not seek to permanently mitigate their risk in relation to default in negotiating the temporary arrangements; and
• each lease must be dealt with on a case-by-case basis having regard to the hardship suffered by the SME tenant (including any insolvency) and the terms of the lease.
What can be agreed between the landlord and the tenant?
The code provides that the following principles should be considered and implemented on case-by-case basis:
• tenants must continue to comply with the lease terms, subject to any temporary arrangements agreed with the landlord. A material breach will mean that the tenant is not protected under the Code;
• landlords must not terminate leases due to non-payment of rent during the COVID-19 (coronavirus) 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% of the rent ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade for the pandemic period and a subsequent recovery period;
• rental waivers must constitute no less than 50% of the total reduction in rent and may be greater where necessary to allow the tenant to fulfil its ongoing obligations, but regard must also be had to the landlord’s financial ability to provide such waivers. Tenants may waive the 50% minimum waiver requirement;
• any remaining relief may be in the form of a waiver or a deferral;
• deferred rent must be paid over the balance of the lease term, but if the balance of the lease term is less than 24 months, then the tenant may pay the deferred rent over a 24 month period, commencing after the end of the pandemic period (i.e. deferred rent could continue to be paid after the lease expiry);
• if the landlord receives any benefit due to the deferral of loan payments by its financier, the landlord should seek to share that benefit with the tenant in a proportionate manner;
• no fees or other charges should accrue on waived or deferred rent;
• landlords must not draw on a tenant’s security for the non-payment of rent during pandemic period or a reasonable recovery period;
• tenants will not be in breach of the lease if they reduce opening hours or cease to trade during the pandemic period; and
• landlords will not apply rent increases (except for retail leases based on turnover rent) during the pandemic period.
Current Position: Legislation has been passed which allows regulations to be made for retail and other prescribed leases for responding to the COVID-19 emergency. Regulations have not yet been released or implemented.
Eligibility: Regulations may apply to non-residential leases, which includes retail shop leases and other non-residential leases, sub-leases and licences for occupation of land.
Eviction and rent increase bans: Not yet announced although expect Code will apply
Legislation provides the power to allow Regulations to implement these measures
We recommend Landlords and Tenants seek to understand their obligations under the Code and continue to negotiate in good faith in order to preserve the relationship between the parties and obtain a mutually favourable outcome.
We recommend that you know your financial position well. You will be asked to make concessions and will need to know the extent of the concessions.
Any concession, variation, amendment or agreement should be contemporaneously recorded in writing.