8 April 2020 - Insights

Navigating Leases and the COVID-19 Outbreak - Part 4

Prime Minister Scott Morrison yesterday announced a mandatory Code of Conduct (“Code”), to be legislated by the States and Territories, which is designed to enable commercial tenants to survive the implications of the COVID-19 pandemic.

A copy of the Code can be found here.

Emergency legislation has been passed in New South Wales and Tasmania allowing Regulations to be created to give effect to the six month moratorium on evictions.

At this stage, legislation has not been passed in Victoria, nor are there Bills before Victorian Parliament to give effect to the Code.  We expect that Victorian legislation won’t be far off, however, once enacted, this legislation will confirm the Victorian start date for the Code provisions.

The Code provisions will endure for the period during which the Commonwealth JobKeeper programme remains operational.

The purpose of the Code is to impose a set of good faith leasing principles for application to commercial tenancies between landlords and tenants, in circumstances where the tenant is a small to medium sized business (with an annual turnover of up to $50 million) and is an eligible business for the purposes of the Commonwealth Government’s JobKeeper programme.

The Code applies to all SME tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic (as evidenced by their eligibility for the Commonwealth Government’s JobKeeper programme).

The concept of “financial stress or hardship” is defined in the Code 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.”

The principles that guide the Code include the following:

  1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
  2. Tenants must remain committed to the terms of their Lease, subject to any amendments to their rental agreement negotiated under this Code.
  3. Landlords must offer Tenants proportionate reductions in rent payable in the form of waivers and deferrals based on the reduction in the Tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

Proportionate is defined in the Code as; “the amount of rent relief proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent recovery period, consistent with assessments undertaken for eligibility for the Commonwealth’s JobKeeper programme.

Waiver and Deferral is defined in the Code as; “any reference to waiver and deferral may also be interpreted to include other forms of agreed variation to existing leases (such as deferral, pausing and/or hibernating the lease), or any other such commercial outcomes 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.

  1. Rent Waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period.  Regard must also be had to the Landlord’s financial ability to provide such additional waivers.
  2. Rent Deferrals must be covered over the balance of the lease term, with a minimum of 24 months (for example, three (3) years remaining on the lease means three (3) years to repay or six (6) months remaining on the lease means 24 months to repay).
  3. No fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferrals.
  4. The tenant should be provided with an opportunity to extend its lease for an equivalent 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.
  5. 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, notwithstanding any arrangements between the landlord and the tenant.
  6. Any reduction in statutory charges (such as land tax or council rates) or insurance will be passed on to the tenant.
  7. There will be a prohibition on penalties for tenants who stop trading or reduce opening hours.
  8. Landlords must not draw on the tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.

The National Cabinet again noted that it expects Australian and foreign banks along with other financial institutions operating in Australia, to support landlords and tenants with appropriate flexibility as they work to implement the mandatory Code.

Where landlords and tenants cannot reach agreement on leasing arrangements, we anticipate that disputes will be referred to mediation conducted by the Victorian Small Business Commission.

Our recommendations remain unchanged.  We recommend that landlords and tenants contact each other, either directly or through their lawyers, and try to negotiate a deal which reflects the Code guidelines.

Wisewould Mahony will continue to provide assistance to both our landlord and tenant clients with respect to lease negotiations.  If you require our assistance with these negotiations, or to prepare a Deed of Variation of Lease, or to refer a dispute to the VSBC if you are unable to reach an agreement, please do not hesitate to contact any member of our leasing team.

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