The Commonwealth Government yesterday announced the details of the much anticipated COVID-19 Code of Conduct for commercial tenancies (the Code). While the finer details are still to be legislated by the various States and Territories, we finally have some clarity around the obligations of both landlords and tenants in dealing with the impact of COVID-19 on leasing.
Unfortunately, even with the release of the Code, there are still a number of unanswered questions. Such as how the Code will deal with pre-COVID-19 breaches, relief arrangements already agreed between parties and how tenants who have voluntarily closed their doors are to be treated – just to name a few.
We hope that these matters and others will be addressed when the Code is legislated in the various jurisdictions and that State and Territory governments work quickly to provide this certainty in these uncertain times.
In the meantime, below is a summary of information released about the Code yesterday.
The Code makes mandatory a set of good faith leasing principles which are to apply to commercial, retail and industrial tenancies that are suffering financial stress or hardship[i] as a result of the COVID-19 pandemic.
The Code comes into effect in all States and Territories from a date following 3 April 2020 (to be defined by each jurisdiction) and is to apply for the duration of the COVID-19 pandemic period[ii].
It is intended that the Code will assist parties to agree tailored, bespoke and appropriate temporary arrangements, taking into account individual circumstances.
The Overarching Principles of the Code that are to govern the arrangements entered into by landlords and tenants are that:
a. parties are to work together in good faith to ensure business continuity and to facilitate the resumption of normal trading at the end of the COVID-19 pandemic period allowing a reasonable recovery period;
b. parties are to act in an open, honest and transparent manner and will each provide sufficient and accurate information[iii] to enable outcomes consistent with the Code;
c. any outcomes must take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses and profitability; and
d. the parties are to assist each other in their dealings with other stakeholders including government, utility companies and banks/other financial institutions.
Landlords and tenants must have regard to the following Leasing Principles when negotiating temporary relief arrangements:
e. landlords are prohibited from terminating leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period);
f. tenants must remain committed to the terms of their lease. Material failure to comply with the substantive terms of their lease will forfeit any protections provided to the tenant under the Code;
g. landlords must offer tenants proportionate[iv] reductions in rent payable in the form of waivers and deferrals[v] 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);
h. rental waivers must constitute no less than 50% of the total reduction in rent payable (as provided for in paragraph (g) above) during the COVID-19 pandemic period[vi] and 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 their lease. Regard must also be had to the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement;
i. payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater – unless otherwise agreed between the parties;
j. landlords should seek to pass onto the tenant any reduction in statutory charges or insurance that the landlord is able to secure together with any benefit it receives due to any deferral it obtains in relation to loan repayments;
k. where appropriate landlord’s should also seek to waive recovery of any other expense (or outgoing payable) by a tenant during the period the tenant is unable to trade. It is important to note that landlords have the right to reduce services as required in such circumstances;
l. if negotiated outcomes require 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 determined by the Commonwealth Government) or the existing lease expiry– once again taking into account a reasonable subsequent recovery period;
m. no fees, interest or other charges are to be applied with respect to any rental waiver or rent deferral;
n. landlords are prohibited from calling on a tenant’s security for the non-payment of rent during the period of the COVID-19 pandemic and/or the subsequent recovery period. This extends to cash bonds, bank guarantees or personal guarantees;
o. tenants should be provided with an opportunity to extend their lease for an equivalent period of the rent waiver/deferral period;
p. landlord’s agree to a freeze on rent increases (excluding retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period; and
q. landlords may not apply any prohibition or levy any penalty if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
What happens when landlords and tenants cannot agree on concessions to apply?
The matter is to be referred to applicable state or territory retail/commercial leasing dispute resolution processing. It is important to note that landlords must not use the mediation process to prolong or frustrate the facilitation of amicable resolution outcomes.
Where to from here?
We can help. Whether you are a landlord, a tenant or an asset manager, you can contact us to discuss your position and concerns and options available to you.
There will be more to come on the implementation of this Code as each jurisdiction legislates the Code and we remain committed to continuing to bring this information to your attention as it comes to hand.
[i] Defined to mean 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 is financial and/or contractual commitments. Small to medium enterprises who are eligible for the Commonwealth Government’s JobKeeper payment are automatically considered to be in financial distress under the Code.
[ii] Defined as the period during which the Commonwealth Government’s JobKeeper programme is operational.
[iii] 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 COVID-19.
[iv] Means 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 Government’s JobKeeper programme.
[v] Any reference to waiver or deferral may also be interpreted to include other forms of agreed variations to existing leases, 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.
[vi] Example: Where a tenant’s revenue has fallen by 30%, then at least 15% of the total cash flow relief is rent free/waiver and the remainder is to be a rent deferral.
