Apr 08, 2020 / News

COVID-19

Commercial leases: Code of Conduct

The National Cabinet has released a mandatory Code of Conduct for commercial leases during the COVID-19 pandemic period.  The Code will be given effect through state and territory legislation, and although won’t supersede such legislation, it will complement it.

All commercial landlords and tenants will need to be familiar with the Code to ensure they conduct themselves in accordance with it.  The Code is available here.

Purpose

The purpose is to impose a set of good faith principles for commercial landlords and tenants to negotiate amendments to existing leasing arrangements during the COVID-19 pandemic period.  This is a period of commercial disruption during which the Code seeks to balance the interests of all parties.

The Code will be mandatory where a tenant is eligible to receive JobKeeper payments and has an annual turnover of up to $50 million. That suggests the turnover threshold will generally be measured on an entity stand-alone basis, not group-wide. However, the Code specifies that turnover will be measured on a group basis for retail corporate groups.  For franchises, only an individual franchisee’s turnover will count.

The Code sets out “proportionate solutions” that may be agreed, and it will operate for the pandemic period. This is broadly regarded as the period the JobKeeper program is operational, which ends in September.  Landlords and tenants outside the mandatory scope of the Code can negotiate their own arrangements.

Overarching principles

To balance the interests of tenants and landlords, it is intended that temporary arrangements that are tailored, bespoke and appropriate with be agreed to.  These are guided by some overarching principles, including:

• The goal is to facilitate a resumption of normal trading during a reasonable recovery period after the COVID-19 pandemic period.
• Negotiate in good faith.
• Act in an open, honest and transparent manner.
• Arrangements to be proportionate and appropriate.
• The risk of default is ultimately borne by the landlord, and landlords must not seek to permanently mitigate this risk through these temporary arrangements.
• Due regard is given to whether a tenant is in administration or receivership, and the application of the Code modified accordingly.

Leasing principles

The leasing principles are to be applied on a case-by-case basis, and broadly include:

• Landlords must not terminate leases.
• Tenants must remain committed to their lease terms, subject to negotiated amendments under the Code.
• Landlords must offer “proportionate reductions” in rent payable, in the form of waivers and deferrals, based on the reduction in the tenant’s trade over the pandemic period and subsequent reasonable recovery period.
• Of the agreed total reduction in rent:
  • At least 50% must be a waiver; and
  • The balance is a deferral.
• The waiver percentage should be higher where not doing so would compromise the tenant’s capacity to fulfil their ongoing obligations.
• Regard must also be had to the landlord’s financial circumstances.  Tenants can agree to something less than the minimum 50% proportion of any rent reduction by waiver.
• The part of any rent reduction that is deferred is amortised and recouped over a minimum period of 24 months (even if the remainder lease term is shorter), commencing after the pandemic period ends. Parties can agree outside of this minimum.
• Any reduction in statutory charges (eg, land tax) to be passed onto the tenant in the appropriate proportion.
• A Landlord should seek to share the benefit it receives from deferred loan repayments.
• Landlords should waive recovery of variable outgoings where the tenant is unable to trade, and reserve the right to reduce services as required.
• No fees, charges or interest to be levied in relation to rent waived/deferred.
• Landlords must not draw on a tenant’s security (bond, bank guarantee, etc) during the pandemic period.
• The tenant should be provided an opportunity to extend the lease under existing terms.
• Freeze on rent increases during the pandemic period.
• Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the pandemic.

Legal counsel would be required to prepare the required documentation to give effect to any agreed amendments. Where landlords and tenants cannot reach agreement, the matter should be referred to the relevant state/territory dispute resolution mediation processes.

Example

The following is an example of a practical variation provided in the Code:

• Tenant suffers a 60% loss of turnover.
• 60% reduction in rent during the pandemic period.
• A minimum of half the above reduction is by way of rent waiver.

The balance is by way deferral, to be recouped over a minimum 24-month period.

How we can help

For tenants, your trusted Nexia Edwards Marshall Advisor can assist with compiling the required information to support a proposal for rent relief that is in good faith, transparent, and appropriate under the Code.

For landlords, we can assist with reviewing the information provided by your tenant, and assessing your own circumstances, in negotiating temporary arrangements under the Code.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.