The State Government’s announcement of a new mandatory commercial leasing Code of Conduct on 7 April 2020 (‘Code’) has provided much needed guidance to parties trying to negotiate new arrangements in light of the challenges arising from the economic impact of Covid-19.
The Code for commercial tenancies is intended to support small and medium sized enterprises affected by the coronavirus. The Code outlines a set of good faith leasing principles for commercial tenancies which now operate between landlords and tenants.
The Code applies to tenants that are a small-medium sized business with an annual turnover of up to $50 million and eligible for the Commonwealth Government’s JobKeeper program. This Code will apply during the COVID-19 pandemic period, which the Government has defined by reference to the period during which the JobKeeper program is operational.
The Code recognises that each premises are different, and so too are their commercial arrangements. Whilst the Code does not impose a static approach, it does require tenants and landlords to act in an honest and transparent manner and to agree on arrangements that take into account the financial impact of the pandemic on the tenant.
Each state and territory will give effect to the Code in legislation or regulations. While we wait for Victoria to give effect to the Code, the key leasing principles in Code that you should be aware of are:
- Landlords cannot terminate a lease due to a tenant’s failure to pay the rent during the COVID-19 pandemic period.
- If a tenant fails to adhere to the substantive terms of their lease, they forfeit their protections provided by the Code. This means that Tenants must comply with the terms of their lease. This is not an excuse to avoid obligations under the lease, including the obligation to pay rent.
- Landlords must offer their tenant proportionate reductions on their rent in the form of waivers or deferrals, of up to 100% of the amount ordinarily payable, based on the reduction in the tenant’s revenue during the COVID-19 pandemic period. This means that if a tenant experiences a 30% fall in the revenue of their business, they are entitled to a 30% reduction of their rent.
- A landlord must waive 50% of the total rent reduction. This means that if a tenant experiences a 30% reduction in revenue, at least half of the rental discount must be a waiver, which the landlord cannot recoup over the term of the lease. In applying this principle, the Code acknowledges that this measure is subject to the Landlord’s ability to provide this waiver.
- The tenant can pay back the landlord any rental deferrals over the balance of the term of their lease or over 24 months, whichever is greater.
- Any reductions enjoyed by the landlord must be proportionately passed on to the tenant. These include statutory charges, including land tax or council rates, or insurance.
- Where a landlord benefits from deferral of loan payments provided by a financial institution, the landlord should seek to share this benefit with the tenant proportionately.
- Where possible, a landlord should not seek to recover from the tenant the payment of expenses or outgoings during the period the tenant is not able to trade.
- If a landlord enters into an arrangement with their tenant that relates to the repayment of monies to the landlord, those repayments should only commence on the earlier of the COVID-19 pandemic ending or the lease expiring. Repayment schedules should take into account a reasonable subsequent recovery period for the tenant’s business.
- No fees, interest or charges can be applied by a landlord to a tenant for waiver or deferral of rent.
- A landlord cannot use the tenant’s security deposit to satisfy the tenant’s rental obligations during the COVID-19 pandemic period, or during a reasonable subsequent recovery period after the end of the pandemic.
- A tenant should be given the opportunity to extend the lease for an equivalent period of the rent reduction period.
- Landlords must freeze rent increases during the COVID-19 pandemic and a reasonable subsequent recovery period.
- Landlords cannot penalise tenants for changing their hours or ceasing trade during the COVID-19 pandemic.
Although the Code stops short of imposing penalties on landlords reluctant to provide relief to tenants, the Prime Minister has indicated that Landlords need to adhere to these principles unless they wish to risk forfeiting their entitlement to concessions such as land tax relief or loan repayment deferrals. How far the State Government will go in terms of enforcing the Code in any legislative or regulatory sense is yet to be seen.
Taking a long-term commercial approach is clearly one that will best serve landlords and tenants, who are each expected to share the burden of the current financial challenges imposed by COVID-19.
If you are a landlord or a tenant and you need assistance to negotiate your way through how the Code applies to your leasing arrangements, we can help. We can review your lease, liaise with your landlord or your tenant and help you put in place an arrangement that meets the requirements of the Code.
The COVID-19 pandemic has brought with it a unique set of challenges for commercial landlords and tenants. The ultimate goal is to ensure both parties are able to see through the current temporary challenges and retain their commercial relationship through to the other side of the pandemic, which shall eventually pass.
Keep well.