16 April 2020

COMMERCIAL TENANCIES

The Covid-19 pandemic is ravaging the Australian economy. In one of a series of support measures, the National Cabinet has intervened in the landlord and tenant relationship with the aim of hibernating businesses, including commercial and retail leases, until the pandemic passes.

What’s happened?

On 7 April 2020 the National Cabinet released a Mandatory Code of Conduct. It applies to commercial, retail and industrial leases. The States and Territories are yet to legislate the Code to give effect to it.

Who does the Code apply to?

The Code applies:

  • to commercial, retail and industrial leases;
  • where the tenant has a turnover of less than $50 million per year and is eligible for the
    JobKeeper payment (that is, has suffered a 30% or more fall in revenue since 1 March 2020);
  • to franchisees at the franchisee level, and retail corporate groups at the group level,
    applying the $50 million threshold;
  • to other tenants who are unable to generate sufficient revenue as a direct result of
    Covid-19 leading to the tenant being unable to meet its financial/contractual obligations including under the lease; and
  • broadly, to any other business, having fair regard to the size and financial structure of
    those businesses.

When does the Code apply?

The Code applies from 3 April 2020 but the States and Territories may also set a commencement date when they legislate the Code.

The period for relief is the same as the JobKeeper program period (currently 6 months to 27 September 2020) plus a “reasonable subsequent recovery period”.

The Code applies so long as there has not been a material failure by the tenant to abide by substantive terms of the lease.

What does the Code do?

The Code is based on tenants and landlords (and banks) working together in good faith to reach a suitable outcome together to preserve the lease arrangements.

The Code sets out a series of parameters around what the agreement can be, which apply to the Covid-19 period plus any reasonable subsequent recovery period including:

Continuity. The lease remains on foot – the parties must abide by its terms. The lease
cannot be terminated, and cash bonds, bank guarantees and personal guarantees cannot be called on, for non-payment of rent. It can be terminated for other reasons.

Proportionality principle. An offer must be made to reduce rent proportionately to the
decline in the tenant’s trade. This is to be done by waivers and deferrals. It is not clear how this is to be calculated given likely increasing declines and month-to-month decline variances.

Rent waivers. The rent waiver must be at least 50% of the reduction (unless the tenant
agrees otherwise) but should be more where it would otherwise compromise the tenant’s capacity to continue to meet its obligations and must take into account the landlord’s financial ability to offer more than 50%. The waiver cannot be recovered by the landlord.

Rent deferrals. The rent deferral repayment should not commence until the earlier of the
end of the Covid-19 period plus the reasonable recovery period, and the expiry of the lease. The repayment must be amortised over the greater of the balance of the lease term and no less than 24 months.

No rent increases. Irrespective of the lease terms, rent increases cannot be imposed
(unless retail turnover rent increases).

No interest or penalty. Interest cannot be charged on unpaid rent. Penalties should not
be imposed on tenants who reduce hours or cease trading.

Outgoings. Outgoings can still be recovered, although landlords are asked to seek to
waive recovery while a tenant is unable to trade and can reduce services (like
cleaning, security).

Reductions. Any reductions in statutory charges (like land tax, Council rates) must be
passed onto the tenant proportionally (this is for both gross and net leases). These reductions will be a matter for the States and Territories and are not known yet.

Extend terms. Tenants should be given the opportunity to extend lease terms for the
equivalent of the period of the rent waiver and deferral.

Loan deferrals. The benefit of a landlord’s loan deferral should be shared with
the tenant.

Mediation. If agreement can’t be reached there will be mediation through the State
or Territories.

What HAS QUEENSLAND DONE SO FAR?

The Code has not yet been made law in Queensland. The Palaszczuk Government has announced that it will consult with stakeholders on the development of systems and implementation of the Code. Temporary legislative changes have been foreshadowed, including eviction moratoriums and rent freezes.

On 9 April 2020, the Queensland State Government announced a land tax relief package. Landowners who agree to provide rent relief for tenants affected by the Covid-19 pandemic are eligible for a 3 month rebate of land tax for 2019/20 and a 3 month deferral for 2020/21.

A landowner can apply for land tax relief if:

  • the landowner rents (or had made available for rent) all or part of a property to a tenant or tenants; and
  • at least one tenant’s ability to pay their usual rent (or the landowner’s ability to secure a tenant) is affected by the Covid-19 pandemic; and
  • the landowner provides rent relief to an affected tenant or tenants equivalent to the land tax rebate (or if unable to be leased, is required by the landowner to meet their financial obligations); and
  • the landowner complies with new leasing requirements, even if the relevant lease is not regulated.

What should I do?

  1. Keep informed about your State’s progress in legislating the Code. States and Territories
    have not yet introduced legislation to give effect to the Code. This may include incentives or other relief for landlords (which must then be shared with tenants). At this stage only principles have been announced and further details will be in the legislation.
  2. Continue to materially comply with the lease. Work together to seek relief from
    government charges, banks, utility companies etc.
  3. Prepare to negotiate in good faith. There is flexibility. Agreements will be bespoke and
    unique. They will be made on a case-by-case basis. Confidentiality of information shared and outcomes will be important to the parties.
  4. Review your lease and understand its terms. Review your insurances, like your business
    continuity insurance, for any eligibility.
  5. If you are a tenant, confirm your eligibility for the JobKeeper program.
  6. If you are a tenant, prepare to be transparent – you will need to substantiate your
    trading decline with financial statements and other financial information. This will give you the protection of the Code and support a rent waiver of more than 50% of the reduction, if you seek one.
  7. If you are a landlord, prepare to share details of relief from your bank and any
    State based relief.
  8. Formally document any agreement reached. This makes sure arrangements are clear to all
    parties and allows them to be revisited if required.

This alert contains general information only. For advice and assistance please contact our Commercial team.

 

 

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