COVID-19 and Commercial Leasing Issues

The Federal and State governments’ COVID-19 restrictions aimed to help slow the spread of COVID-19 have had widespread economic consequences, leaving many businesses with significantly reduced or no cashflow to pay their rent. To aid the management of cashflow for SME tenants and landlords on a proportionate basis, the National Cabinet has imposed a Mandatory Code of Conduct (Code) which sets out 14 good faith leasing principles for application to commercial tenancies.

The Code will come into effect on a date following 3 April 2020 to be determined by each State and Territory jurisdiction and will continue for a period during which the JobKeeper Programme remains operational[1]. The Code significantly alters the legal principles which would otherwise regulate the rights and obligations of landlords and tenants under those leases to which the Code applies.

For our Victorian readers, on 23 April 2020 the Victorian Government passed the COVID-19 Omnibus (Emergency Measures) Act 2020 (Omnibus Act). Amongst other matters, the Omnibus Act provides for regulations to be made in relation to retail and commercial leases which are in line with the decisions of the National Cabinet. We will provide comments on these Victorian specific regulations as they evolve. In the interim, we have outlined below the decisions made at a Federal level.

Below we have outlined our insights to answer some of our client’s most pressing questions in relation to eligibility, rent reduction entitlements and tenant protections, amongst others.

What is the Code?

• The Code is a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme[2].

Is my business eligible?

• The Code is mandatory to all commercial tenancies where the tenants have:

• • signed up to the JobKeeper Programme; and
  • have an annual turnover of $50 million per annum or less[3].

• The limitation described in paragraph 2 b is important to note, as tenants who would be entitled to participate in the JobKeeper Programme are not eligible for rent relief under the Code if they have a turnover exceeding $50 million.
• Thus, to be eligible, a business must have suffered a fall in turnover of more than 30 per cent for at least one calendar month post 30 March 2020 by comparison to the same calendar month in 2019. Notably, tenants only need to demonstrate their eligibility for the JobKeeper Program, meaning it is not necessary that a tenant’s business is actually receiving JobKeeper payments for the Code protections to apply.
• As the Code obliges tenants and landlords to act in an open, honest and transparent manner, landlords will be within their rights to request verification that their tenants are covered by the Code.

What can I expect my rent reduction entitlements to be as a tenant?

• The Code is founded upon the principle of proportionality, with specific regard to the revenue, expenses and profitability of tenants[4].
• Thus, tenants are entitled to a reduction in rent proportionate to the decline in each tenant’s business turnover during the COVID -19 pandemic period and a reasonable subsequent recovery period.
• Rent reductions may consist of a combination of rent waivers and rent deferrals of up to 100% of the amount of rent ordinarily payable[5]. However, the Code has proscribed the following requirements:
  • rent waivers must comprise no less than 50 per cent of the total rent reduction allowed to tenants under the proportionality principle (unless tenants choose to wave this requirement)[6];
  • rent waivers should constitute the greater proportion of the total rent reduction in cases where failure to so would compromise a tenant’s capacity to fulfil its ongoing obligations under the lease agreement [7];
  • payment of rent deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater (unless otherwise agreed by the parties)[8]; and
  • no fees, interest or other charges may be applied to waived or deferred rent.

Are there further considerations I need to be aware of when negotiating with my landlord?

• The Code is designed to enable tenants to negotiate with landlords and tailor bespoke leasing arrangements.
• However, to strike an equitable balance, the Code has provided further practical guidance when negotiating rent reduction entitlements:
  • the timing of repayments of deferred rent should avoid placing any undue financial burden on businesses and should only commence upon the earlier of the COVID-19 pandemic period ending or the lease expiring, taking into account a reasonable subsequent recovery period[9];
  • tenants should be provided with an opportunity to extend their leases for a period equivalent to the rent waiver and/or deferral period to provide additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic ends[10]. However:

• where tenants wish to vacate the premises upon expiry of the term, rather than extending the term, the parties may need to agree that the outstanding amount of rent which will be paid upon expiry of the lease, otherwise, the requirement described in paragraph 8 c above will apply; and
• If paragraph 8 c above applies, the rent repayment obligations will most likely continue upon expiry of the lease.

Has the Code provided any further tenant protections?

• Tenants covered by the Code will be protected from the following during the COVID–19 pandemic period (which may include a subsequent recovery period):
  • termination of their lease due to non-payment of rent[11];
  • rent increases, excluding retail leases based on turnover rent[12];
  • fees, interests and other punitive charges stemming from rent waivers or deferrals;
  • penalties for tenants who stop trading or reduce opening hours during the COVID-19 pandemic period[13]; and
  • a landlord making a claim on a tenant’s security (i.e. cash bond, bank guarantee or other personal guarantee) for non-payment of rent.[14].

What about savings made due to loan or tax relief?

• Under the Code, if landlords are granted any relief from their obligations to pay land tax, council rates or insurance premiums, those savings are required to be proportionately passed on to their tenants. Landlords are also required to pass on a proportionate amount of relief provided by financial institutions as part of the Australian Bankers Association’s COVID–19 response[15].
• As noted above, the Code requires landlords and tenants to act honestly and with transparency. On that basis, tenants may be within their rights to request disclosure of any relief landlords receive in relation to land tax, rates and loan repayments.

What are the benefits for landlords?

• The most significant benefit for landlords under the Code is that tenants are required to honour the terms of their lease, subject to any amendments to rent negotiated under the Code[16]. In this regard, any material failure by tenants to abide by the substantive terms of the lease will forfeit any protections provided to tenants under the Code[17].
• This ensures tenants continue to remain committed to the terms of their lease, offering comfort of tenure for landlords.
• Ultimately, this is preferable to vacant premises.
• The Code also states that parties must have regard to the landlord’s financial ability to provide additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.[18]
• Landlords are to consider, where appropriate, waiving recovery of outgoings payable or any other expense during the period where the tenant cannot trade[19]. The Code reserves the right for landlords to reduce services required in relation to these outgoings[20].

What if I cannot come to an agreement with my landlord?

• The Code will allow disputes to be referred to the applicable State or Territory leasing dispute resolution process for binding mediation[21].

What else should my business consider?

Tenant

• Commence discussions with your landlord as soon as possible in accordance with the Code, with a view to agreeing a waiver, reduction or deferral of rent payable during the COVID-19 pandemic period and a subsequent recovery period.
• There should be no indication by tenants that they intend to stop paying rent – negotiations should be framed under the guiding principles of the Code. This will eliminate the possibility of a repudiation of the lease.
• Tenants should also ensure that they continue to maintain all insurances required under their leases during any period the premises are closed.
• If you are a foreign owned business, a substantial variation of the lease terms may attract the operation of the Foreign Acquisitions and Takeovers Act 1975 and may require a no objection letter or approval subject to relevant thresholds.

Landlord

• Landlords should request their tenants provide relevant information and evidence to demonstrate that their tenants are eligible for relief under the Code, upon discussions commencing.

Conclusion

COVID–19’s global disruption is uncertain with continual business implications arising every day. Businesses should carefully consider their current leasing arrangements before performing or not performing their obligations under their leases.

Nicholson Ryan delivers expert advice across all areas of corporate and commercial law and is assisting clients on a broad spectrum of legal issues in relation to COVID–19. If you have any queries as to the matters addressed in this article, please contact us on (03) 9640 0400 or email us at admin@nrlawyers.com.au

This memorandum is intended as general information only. It does not purport to be comprehensive legal advice. Readers must seek professional advice before acting in relation to the aforementioned matters.

References

[1] Australian National Cabinet, National Cabinet Mandatory Code of Conduct (2020), page 6.

[2] Ibid, page 2.

[3] Ibid, page 1.

[4] Ibid, page 2.

[5] Ibid, Principle 3, page 3.

[6] Ibid, Principle 4, page 3

[7] Ibid.

[8] Ibid, Principle 5, page 3

[9] Ibid, Principle 9, page 4.

[10] Ibid, Principle 12, page 4

[11] Ibid, Principle 1, page 3.

[12] Ibid, Principle 13, page 4.

[13] Ibid, Principle 14, page 4.

[14] Ibid, Principle 11, page 4.

[15] Ibid, Principle 7, page 4.

[16] Ibid, Principle 2, page 3.

[17] Ibid.

[18] Ibid, Principle 4, page 3

[19] Ibid, Principle 8, page 4.

[20] Ibid, Principle 8, page 4.

[21] Ibid, page 4 – 5.