Guidelines surrounding commercial tenancies and COVID-19

Prime Min­is­ter Scott Mor­ri­son announced a manda­to­ry Code of Con­duct which out­lines a set of good faith leas­ing prin­ci­ples for com­mer­cial ten­an­cies includ­ing retail, office and indus­tri­al ten­an­cies.

The Code aims to sup­port small and medi­um sized enter­pris­es (SME) affect­ed by COVID-19 dur­ing the government’s busi­ness hiber­na­tion peri­od. We’ve sum­marised the key infor­ma­tion and list­ed it below, take a read…

 

What does the Code of Con­duct out­line?

• The pur­pose of the Code of Con­duct is to out­line a set of good faith prin­ci­ples applic­a­ble for com­mer­cial ten­an­cies to aid the man­age­ment of cash­flow for eli­gi­ble ten­ants and land­lords dur­ing the COVID-19 pan­dem­ic.
• The Code requires land­lords to reduce rent pro­por­tion­al to their tenant’s decline in turnover to ensure that the bur­den is shared between land­lords and ten­ants. This is to be achieved through a com­bi­na­tion of waivers of rent and defer­rals of rent over the course of the pan­dem­ic peri­od via waivers and lease exten­sions.
• For eli­gi­ble ten­an­cies, waivers of rent must account for at least 50 per cent of the of the total reduc­tion in rent payable, while defer­rals must be cov­ered over the bal­ance of the lease peri­od and in any case for no less than 24 months, unless oth­er­wise agreed by the par­ties.
• Arrange­ments will be over­seen by bind­ing medi­a­tion process and will be imple­ment­ed and reg­u­lat­ed by each state and ter­ri­to­ry.

Read the full SME Com­mer­cial Leas­ing Prin­ci­ples Code of Con­duct here.

 

Who is eli­gi­ble?

To be eli­gi­ble to nego­ti­ate under the Code either par­ty must:

• be a busi­ness that is in a posi­tion of finan­cial dis­tress;
• have a turnover of $50 mil­lion or less;
• be eli­gi­ble to receive sup­port under the Job­Keep­er pro­gram (mean­ing the busi­ness has expe­ri­enced at least a 30 per cent drop in rev­enue due to Covid-19 restric­tions).

 

Can my com­mer­cial lease be ter­mi­nat­ed dur­ing this time?

Among the prin­ci­ples is a require­ment for land­lords to refrain from ter­mi­nat­ing leas­es due to non-pay­ment of rent dur­ing the COVID-19 pan­dem­ic peri­od.

Also includ­ed are expec­ta­tions that ten­ants remain com­mit­ted to the terms of their lease and that any reduc­tion in statu­to­ry charges (e.g. land tax, coun­cil rates) or insur­ance is passed on to the ten­ant in the appro­pri­ate pro­por­tion applic­a­ble under the terms of the lease.

 

When does it come to effect?

The Code comes into effect from a date fol­low­ing 3 April 2020 for the peri­od dur­ing which the Job­Keep­er pro­gramme is oper­a­tional. The actu­al com­mence­ment date will be defined by each state and ter­ri­to­ry gov­ern­ment for their juris­dic­tion.

 

Is there any­thing else I should be con­sid­er­ing?

Some oth­er mat­ters you might wish to con­sid­er include:

1. Can a ten­ant ter­mi­nate the lease or abate rent if an infec­tion or gov­ern­ment reg­u­la­tion forces them to close?
2. How should agree­ments to defer or waive pay­ments be struc­tured to pre­serve rights in the event of insol­ven­cy
3. What con­se­quences flow from the reg­u­la­tions issued under the COVID-19 Leg­is­la­tion Amend­ment (Emer­gency Mea­sures) Act 2020 No.1 passed by the NSW Par­lia­ment
4. Can a land­lord close down access to the build­ing?
5. What steps may a land­lord take if the ten­ant aban­dons the build­ing?  Are they dif­fer­ent if the tenant’s con­duct is forced by gov­ern­ment?
6. Who is respon­si­ble for fumi­ga­tion?  How are costs allo­cat­ed between the land­lord and ten­ant?

 

What are key terms used in the Code? 

The fol­low­ing def­i­n­i­tions are pro­vid­ed for ref­er­ence in the appli­ca­tion of the Code.

1. Finan­cial Stress or Hard­ship: an indi­vid­ual, busi­ness or company’s inabil­i­ty to gen­er­ate suf­fi­cient rev­enue as a direct result of the COVID-19 pan­dem­ic (includ­ing gov­ern­ment-man­dat­ed trad­ing restric­tions) that caus­es the ten­ant to be unable to meet its finan­cial and/or con­trac­tu­al (includ­ing retail leas­ing) com­mit­ments. SME ten­ants which are eli­gi­ble for the fed­er­al government’s Job­Keep­er pay­ment are auto­mat­i­cal­ly con­sid­ered to be in finan­cial dis­tress under this Code.
2. Suf­fi­cient and accu­rate infor­ma­tion: this includes infor­ma­tion gen­er­at­ed from an account­ing sys­tem, and infor­ma­tion pro­vid­ed to and/or received from a finan­cial insti­tu­tion, that impacts the time­li­ness of the Par­ties mak­ing deci­sions with regard to the finan­cial stress caused as a direct result of the COVID-19 event.
3. Waiv­er and defer­ral: any ref­er­ence to waiv­er and defer­ral may also be inter­pret­ed to include 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. Any amount of reduc­tion pro­vid­ed by a waiv­er may not be recouped by the Land­lord over the term of the lease.
4. Pro­por­tion­ate: 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 pro­gramme.

 

Exam­ple:

The fol­low­ing sce­nar­ios are exam­ples only, not­ing the cir­cum­stance of each land­lord, SME ten­ant and lease are dif­fer­ent, and are sub­ject to nego­ti­a­tion and agree­ment in good faith.

Exam­ples of prac­ti­cal vari­a­tions reflect­ing the appli­ca­tion of the prin­ci­ple of pro­por­tion­al­i­ty may include but are not lim­it­ed to:

Qual­i­fy­ing ten­ants would be pro­vid­ed with cash flow relief in pro­por­tion to the loss of turnover they have expe­ri­enced from the COVID-19 cri­sis i.e. a 60% loss in turnover would result in a guar­an­teed 60% cash flow relief.

• At a min­i­mum, half is pro­vid­ed as rent free/rent waiv­er for the pro­por­tion of which the qual­i­fy­ing tenant’s rev­enue has fall­en.
• Up to half could be through a defer­ral of rent, with this to be recouped over at least 24 months in a man­ner that is nego­ti­at­ed by the par­ties

So, if the tenant’s rev­enue has fall­en by 100%, then at least 50% of total cash flow relief is rent free/rent waiv­er and the remain­der is a rent defer­ral.

If the qual­i­fy­ing tenant’s rev­enue has fall­en by 30%, then at least 15% of total cash flow relief is rent free/rent waiv­er and the remain­der is rent defer­ral.

Care should be tak­en to ensure that any repay­ment of the deferred rent does not com­pro­mise the abil­i­ty of the affect­ed SME ten­ant to recov­er from the cri­sis.

The par­ties would be free to make an alter­na­tive com­mer­cial arrange­ment to this for­mu­la if that is their wish.

 

For assis­tance or advice in rela­tion to these or any oth­er mat­ters in rela­tion to your com­mer­cial lease please call us on 02 6583 0400 or send an email to info@dohlaw.com.au