COVID 19: Commercial Leasing Principles
On Tuesday, 7 April 2020 the Federal Government through the Prime Minister made announcements yesterday after a meeting of the National Cabinet of a Mandatory Code of Conduct to deal with commercial leasing principles during COVID 19. The intention is that the Code of Conduct will be legislated and regulated in each State and Territory. We can expect news in relation to this over the next week.
These have been uncertain times for landlords and tenants in relation to commercial leases given the impact of COVID 19 on all parties and the desire of parties to have certainty as to what their rights are in such circumstances. Accordingly, it is positive news that the Code has been released. We have summarised the Code below.
The purpose of the Code is to make mandatory a set of leasing principles for application to commercial tenancies (which includes retail, office and industrial) between landlords and tenants to apply where the tenant is an eligible business for the purpose of the Commonwealth Government's JobKeeper Program.
Who Does It Apply To?
The Code applies to all tenancies that are suffering financial stress or hardship as a result of COVID 19 as defined by their eligibility for the Commonwealth Government's JobKeeper Program with an annual turnover of up to $50 million. It should be noted that in respect of retail corporate groups, the $50 million annual turnover threshold is applied at the group level (rather than individual retail outlet level) and in relation to franchises is applied at the franchisee level.
The Code is intended to apply during the COVID 19 pandemic period which is defined as the period during which the JobKeeper Program remains operational. The point is made that the principles of the Code should apply in spirit to all leasing arrangements for affected businesses having fair regard to size and financial structure of the businesses.
As indicated above, the Code will be given effect through State and Territory legislation or regulation as appropriate. We await the State and Territory legislation and regulation but the release of the Code gives us an indication of how parties should be operating pending the legislation and regulation.
The intention is that landlords will agree tailored bespoke and appropriate temporary arrangements for each tenant taking into account their particular circumstances on a case by case basis. The overarching principles can be noted in detail in the attached copy of the Code.
In negotiating and enacting appropriate temporary arrangements under the Code, the principles listed in the Code are to be applied as soon as practicable on a case by case basis. These principles include:
- Landlords must not terminate leases due to non-payment of rent during the COVID 19 pandemic period (or reasonable subsequent recovery period).
- Tenants must remain committed to the terms of their lease subject to any amendments to their rental agreement negotiated under the Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under the Code.
- Landlords must offer tenants proportionate reductions 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. Waiver and deferral are defined as including other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease) or any other such commercial outcome of agreements reached between the parties. Note importantly that any amount of reduction provided by a waiver may not be recouped by the landlord over the term of the lease. Proportionate is defined as the amount of rent relief proportionate to the reduction in trade as a result of the COVID 19 pandemic plus a subsequent reasonable recovery period, consistent with assessments undertaken for eligibility for the Commonwealth's JobKeeper Program. Note in Appendix 1 an example of the application of the principle of proportionality.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID 19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant's capacity to fulfil their ongoing obligations under the lease agreement. Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months whichever is the greater unless otherwise agreed by the parties.
- Landlords must not draw on a tenant's security for the non-payment of rent during the period of the COVID 19 pandemic and/or a reasonable subsequent recovery period.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID 19 pandemic and a reasonable subsequent recovery period notwithstanding any arrangements between the landlord and tenant.
- Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID 19 pandemic.
Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID 19 pandemic) the matter should be referred and subjected (by either party) to applicable State or Territory retail/commercial leasing dispute resolution processes for binding mediation.
The Code will be supported by State-based industry Code Administration Committees.
The Codes comes into effect in all States and Territories from a date following 3 April 2020 to be defined by each jurisdiction for the period during which the Commonwealth JobKeeper Program remains operational.
Please do not hesitate to contact us if you would like a copy of the Code, require any further information in relation to the Code and its interpretation or are experiencing any issues on which you require legal assistance as a result of COVID 19.