Commercial and Retail Tenancies
Commercial and retail tenancies have been a hot topic for the past two months. When the Federal Government issued lockdown procedures in March 2020, many businesses were forced to close their store fronts or have seen a drastic downturn in foot traffic. Since this date both landlords and tenants have been eagerly awaiting legislative changes to provide clarity on how to manage their leases.
In April 2020, the National Cabinet Mandatory Code of Conduct for commercial leases was released by the Federal Government. The Code is designed to impose a set of “good faith” leasing principles between landlords and tenants.
The Code applies to commercial and retail tenants who have an annual turnover of less than $50 million and are eligible for the Government’s JobKeeper program. The Code will remain in force for the duration of the JobKeeper program.
State Implementation
For the Code to be effective, it must first be implemented in legislation or regulation by each State or Territory.
This has already occurred in New South Wales, Western Australia, Victoria and Tasmania and is expected to soon come into force in Queensland, South Australia and the Northern Territory although we note that some of these states have already taken steps to implement parts of the Code. On top of the leasing principles set out in the Code, if a tenant in South Australia or Western Australia is suffering significant hardship due to the crisis, a tenant will be allowed to terminate their lease early.
Leasing Principles
The Code includes 14 new “Leasing Principles” that restrict landlords’ powers and set out new requirements against which landlords and tenants must renegotiate their leases. The 14 Leasing principles are as follows:
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Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period.
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Tenants must uphold the other terms of the lease, subject to any amendments to their rental agreement negotiated under the Code and mandatory restrictions under health code requirements.
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Landlords must offer tenants reductions in rent proportionate to the reduction in the tenant’s trade in the form of waivers and deferrals of up to 100% of the amount ordinarily payable.
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Rental waivers must constitute at least 50% of the total reduction in rent payable with rental deferrals making up the remaining percentages. The rental waiver can be increased above 50% in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease.
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Rental deferrals are paid back to the landlord over the greater of the remainder of the lease or minimum of 24 months.
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Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be proportionately passed on to the tenant applicable under the terms of the lease.
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A landlord should seek to share any benefit it receives due to deferral of loan payments with the tenant in a proportionate manner.
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Landlords should seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade.
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Repayments of any deferred rent should not commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring.
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No fees, interest or other charges should be applied with respect to rent waived or deferred.
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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.
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The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period.
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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, unless agreed otherwise between the parties.
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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
In addition to the above Leasing Principles, the Code also requires landlords and tenants to negotiate transparently and in good faith, and to consider the unique difficulties posed by the COVID-19 virus. If landlords and tenants can’t reach an agreement on any dispute, the Code allows either party to refer the dispute to their applicable State or Territory retail/commercial leasing dispute resolution regulatory body for binding mediation.
As the implementation of the Code in each State is only recent, there are no clear guidelines on what sort of information parties must provide to each other to comply with the above principles. The Code asks that the parties provide information generated from an accounting system or information provided to or received from a financial institution, if that information may help show the financial impact on their business caused by COVID-19.
We have already seen examples of landlords asking tenants to provide detailed business plans, sales projections, aged receivables, ATO balances, income tax returns, BAS statements, franchise agreements, profit and loss and bank account statements. In some cases the requests have been well in excess of the information needed for negotiations.
Overall, before landlords or tenants start negotiating, we recommend they familiarise themselves with the Code as applied in their State and gather all information necessary to assist with the negotiations. Finally, any agreed outcomes need to be clearly documented by the parties.
If you need any assistance with negotiating an existing or new lease please contact us at info@questlegal.com.au
