On 7 April 2020, our Prime Minister announced the terms of the National Cabinet's decision in relation to a mandatory code of conduct for commercial tenancies ("the Code").
The Code is a set of principles to guide rent relief negotiations between landlords and tenants.
The Code will be implemented by each State and Territory, including via legislation or regulation as appropriate.
Who will the Code apply to?
The Code will apply to commercial tenancies (including retail, office and industrial) where the tenant is suffering financial stress or hardship as a result of the COVID-19 pandemic: the tenant must be:
- an eligible business for the purposes of the Commonwealth Government's JobKeeper program; and
- an SME with annual turnover of no more than $50million.
The Code does not apply to non-eligible commercial tenancies, nor is the Code relevant to residential tenancies.
Although the Government has introduced a moratorium on eviction of residential tenants, where possible, residential tenants will still need to meet their rental payments. There is no Australia wide approach agreed upon to date by the National Cabinet with regard to residential tenancies. Residential tenants will still need to wait and see what their State and Territory Governments offer.
Objective of the Code
The objective of the Code is to ensure that:
- landlords and tenants negotiate and agree upon temporary arrangements for each tenant, on a case by case basis, and take into account their particular circumstances;
- parties share the financial hardship arising as a result of the pandemic, in a proportionate and measured manner; and
- the turnover reduction of the tenant's business is reflected in any rental waiver to be agreed upon.
The Government is encouraging landlords and tenants to share a common interest in working together to ensure business continuity, and to facilitate resuming trading activities at the end of the pandemic. In doing so, parties are expected to:
- negotiate in good faith towards achieving a balance of interests and a mutually satisfactory outcome; and
- act in an open, honest and transparent manner and must each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the Code.
Principles of the Code
Where the Code is applicable, the principles which landlords and tenants should apply when negotiating any temporary arrangements include:
- A landlord must not terminate a lease due to non-payment of rent during the pandemic period (or any reasonable recovery period subsequent to that).
- A landlord must not draw on a tenant's security (eg cash bond, bank guarantee, personal guarantee) during this period.
- Tenants must honour their lease, subject to any variations to their lease agreement negotiated under the Code. Any material failure by a tenant to abide by substantive terms of their lease will forfeit any protections provided to the tenant under the Code.
- Landlords will be required to offer tenants a reduction in rent "proportionate" to the trading reduction in the tenant's business, through a combination of waivers and rent deferral, of up to 100% of the rent ordinarily payable. This is on a case by case basis, based on the tenant's actual reduction in trade.
- Waivers of rent must account for at least 50% of the reduction in rent provided to the tenant. Regard must also be had to the landlord's ability to provide any additional waiver, and tenants may, by agreement, waive the requirement for a 50% minimum waiver.
- Rent deferrals must be repaid by the tenant, 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.
- Tenants should be provided with an opportunity to extend their lease for a period equivalent to any period of rent waiver and/or deferral.
- There is to be a freeze on any rent increases (except for retail leases based on turnover) for the duration of the pandemic and a reasonable recovery period subsequent to that.
- Tenants may reduce opening hours or cease to trade due to the pandemic, without penalty from the landlord.
- No fees, interest or other charges should be applied with respect to any waived or deferred rent.
- Any reductions obtained by the landlord on statutory charges (such as land tax or council rates) are to be passed onto the tenant in appropriate proportions applicable to each lease. (Note the WA State Government is still considering the land tax waiver and deferral eligibility for land owners).
- Where appropriate, landlords should seek to waive recovery of other expenses (or outgoings) payable by a tenant, under lease terms, during any period a tenant is not able to trade. Landlords may reduce the services required in such circumstances.
- There will be a binding mediation process if required, where parties are unable to reach mutual agreement.
The Government has again stressed that Banks must also come to the table here, to provide the necessary financial support and relief to landlords.
What should commercial landlords and tenants do now?
- Although the Code is still to be legislated at State level, landlords and tenants should start communicating (if they haven't already) – on a without prejudice and confidential basis.
- Landlords should make enquiries of each of their tenants to establish whether the Code will apply to their lease, on a case-by-case basis.
- Tenants should not assume they are entitled to relief under the Code (or otherwise) – a tenant must be able to demonstrate their financial stress or hardship to the landlord, and their eligibility for negotiating rent relief from their landlord under the principles of the Code. Tenants will be required to provide their landlord sufficient and accurate financial information within the context of negotiations. Start gathering that information.
- Tenants should otherwise continue paying rent, if they are not suffering financial hardship. For some tenants, it may be too early to ascertain whether they would be eligible for the JobKeeper program (and whether the Code will apply).
- Regular and open communication between parties should continue throughout the pandemic, to monitor any changes in the tenant's financial position.
- While parties should commence discussions now to explore mutually viable arrangements, they may wish to consider holding off locking in or formally documenting any agreement until such time as our State Government introduces the necessary legislation or regulations incorporating the Code. Parties can then ensure that any agreement reached complies with any such new legislation. Any agreement reached between parties in the meantime, should be made subject to the impending legislation.
- Where parties are able to reach mutual satisfactory agreement between themselves and once the terms of the new legislation are known, we recommend they should document any agreement in writing – preferably by way of a deed of variation of the lease.
Where to from here?
As the situation continues to evolve and Government makes further announcements, we will provide further updates on any changes to the guiding principles made in relation to commercial leases, and details of the legislation and regulations once introduced in WA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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