Update - Property issues in Australia: Tenants and COVID-19

Commercial Tenancies Code of Conduct

On 7 April 2020, the Prime Minister, Scott Morrison, provided details of the mandatory Commercial Tenancies Code of Conduct to be legislated and regulated in each state and territory.

Purpose of the Code

The purpose of the mandatory Code of Conduct for commercial leases (Code) is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between landlord and tenant and also some third party operators, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.

Eligible Tenants

This Code applies to all tenants that are suffering financial stress or hardship as a result of the COVID-19 pandemic, as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million.

“Financial Stress or Hardship” is defined as “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.”

The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than in respect of one retail outlet).

Effect and Duration

State and territory legislation or regulation as appropriate will give effect to the Code. The Code is not intended to supersede current legislation, but aims to complement it during the COVID-19 crisis period.

The Code is to come into effect from a date following 3 April 2020 (being the date that National Cabinet agreed to a set of principles to guide the Code to govern commercial tenancies as affected by the COVID-19 pandemic) to be defined by each state and territory, for the period during which the Commonwealth JobKeeper programme remains operational.

Terms of Temporary Arrangements

The Code requires that when negotiating and enacting appropriate temporary arrangements the following leasing principles should be applied as soon as practicable on a case-by-case basis:

1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period and/or reasonable subsequent recovery period.
2. Tenants must remain committed to the terms of their lease, subject to any amendments to rental payments. A tenant’s material failure to abide by substantive terms of a lease will forfeit any protections provided to the tenant under the Code.
3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

   A “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”.

   “Proportionate” is “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”.

4. Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period. The reduction in rent should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease. The Landlord’s financial ability to provide such additional waivers must be taken into consideration and tenants may waive the requirement for a 50% minimum waiver by agreement.
5. Payment of rental deferrals by the tenant must be amortised over the balance of the term of the lease or for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
6. A reduction in statutory charges (e.g. land tax, council rates) or insurance provided to landlord is to be passed on to tenants in the appropriate proportion applicable under the lease.
7. A landlord should seek to share any benefit it receives due to deferral of loan payments with the tenant in a proportionate manner.
8. Landlords should on a case by case basis 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. In order to facilitate these waivers landlords may reserve the right to reduce services associated with these expenses.
9. If negotiated arrangements necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the lease expiring, and taking into account a reasonable subsequent recovery period.
10. No fees, interest or other charges should be applied with respect to rent waived and no fees, charges or punitive interest may be charged on deferrals.
11. Landlords must not draw on a tenant’s security for the non-payment of rent (whether a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
12. The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
13. 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.
14. Landlords may not apply any prohibition or any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

Overarching Principles

The overarching principles of the Code, which parties need to keep in mind when negotiating, are that landlord and tenants:

• share a common interest in working together, to ensure business continuity, and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic and/or during a reasonable recovery period;
• will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes;
• will negotiate in good faith;
• will act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the Code;

  “Sufficient and accurate information 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.”

• will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to revenue, expenses, and profitability;
• will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of the Code;
• will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under the Code;
• consider factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic; whether the tenant’s lease has expired or is soon to expire; and whether the tenant is in administration or receivership;
• consider and take into account the structure of each lease, the period of tenure, the different mechanisms for determining rent. If the lease was already in arrears or is in a holding over; and   
• should give regard to whether the tenant is in administration or receivership, and the application of the Code modified accordingly.

Code Administration Committees

The Code will be supported by state based Industry Code Administration Committees, comprising representatives from relevant industry bodies representing landlord, tenant and SME interests, with an Independent Chair appointed by the relevant State/Territory Government.

Committee members’ roles will be to promote awareness; encourage application of the Code; encourage its application by the broader retail industry and monitor the operation of the Code.

Mediation

Where landlords and tenants cannot reach agreement on leasing variations and arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners, Champions or Ombudsmen where applicable.

Assistance

Our real estate team can assist you, whether you are a landlord or tenant, with deciphering the Code, ascertaining whether it applies to your circumstances, negotiating arrangements with the other party, drafting relevant agreements/deeds, attending mediation and working with you through this crisis.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).