Leasing Update: “Mandatory Code of Conduct” Announced for Commercial Tenancy Relief
On 7 April 2020, the Prime Minister announced a ‘Mandatory Code of Conduct’ approved by the National Cabinet for relief to commercial and retail tenants whose small to medium businesses are affected by COVID-19. As noted in our earlier articles, there remains uncertainty until the Code is enacted by State legislation.
Which leases does the code apply to?
The Code mandatorily applies to all leases where the tenant is being impacted by Covid-19 to an extent that they are eligible for the Commonwealth Government’s JobKeeper programme. That is, regardless of the type of lease or the permitted use; if the tenant has an annual turnover of up to $50 million and has suffered a drop of more than 30% of its turnover/revenue (as compared to that same month last year) then the code must be applied by its landlord.
Tenants will likely bear the onus of proof to show landlords that they are eligible for the protections offered by the Code. The National Cabinet have further suggested that during the COVID-19 pandemic period, the principles of the Code should (as opposed to must) ‘apply in spirit to all other leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses’. Our FREE application form is available here to help both parties facilitate discussions.
Example 1: David Jones being a corporate retailer with a collective turnover in excess of $50million would not be eligible for JobKeeper and therefore the Code would not apply to its tenancy – however if it is suffering hardship a landlord is encouraged to apply the same principles.
Example 2: A franchisee of McDonalds or a private gym operator with individual turnover of less than $50million may be eligible if it can prove that its monthly turnover for March 2020 was over 30% less than its turnover for March 2019. If this is proven then the landlord must apply the Code and provide rental relief.
Key principles and minimum relief
The major principles summarised below are to be applied on a case-by-case basis ‘unless agreed otherwise by the parties’. If agreement cannot be reached or any principles are disputed the matter may be referred to the Victorian Small Business Commission for adjudication.
1. Rent relief
Landlords must offer tenants proportionate reductions in rent (by a combination of rent waiver and rent deferral) on a case-by-case basis. The key here is that the reduction is commensurate with the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
Once the tenant’s trade reduction is known, the minimum rent reduction can be applied and 50% of any such reduction must be a rent waiver. Contrary to what some parties had interpreted, this does NOT mean a full 50% rent waiver is applied to every tenant automatically. Interestingly, the Code mentions that regard must also be had to the Landlord’s financial ability to provide such waivers.
The balance portion of rent is to be deferred and is to be re-paid once the pandemic passes, over the balance of the lease term or a period of at least twenty-four months, whichever is greater. However, if the balance of the term is less than twelve months, then the deferred rent is to be paid over a period of twelve months.
Landlords cannot charge fees or penalties on waived rent nor ‘penalty rates of interest’ on deferred rent but may charge normal interest.
2. Share of landlord benefits/outgoings
Any reduction in statutory charges (eg. land tax, council rates, insurance) and any loan repayment benefits derived by the landlord should be shared with the tenant where possible. Outgoings should be waived during any period a tenant is unable to trade though a landlord may reduce or remove services to achieve this.
3. Landlord restrictions
Landlords cannot draw on a tenant’s security (cash bond or bank guarantee) for non-payment of rent and must not terminate leases during the crisis period (or reasonable recovery period) if a tenant under the Code fails to pay rent. There will also be no base rent increases during the pandemic and recovery period.
Landlords cannot take any action if a tenant reduces opening hours or ceases to trade during the pandemic. Tenants with imminent lease expiries should be provided with an opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period to recover their lost trade time.
4. Tenant commitment
Tenants must remain committed to their lease and any amendments negotiated. Should they fail to do so they will forfeit their protections under the Code.
Example 3: An eligible tenant proves to its landlord that its turnover in March 2019 of $50,000 reduced to $20,000 in March 2020, being a 60% loss. It currently pays $10,000 per month in rent to its landlord. At a minimum, its landlord is required to provide it with a 60% relief package (being $6,000) with at least half of that relief being a waiver ($3,000) and the other half being a deferral ($3,000). For the month of April, the tenant will therefore need to pay $4,000 in rent with a further $3,000 repayable over 24 months ‘in a way that ensures that those repayments do not compromise the ability of the business to recover from the crisis’. The parties may negotiate this monthly or agree and fix the relief amount on a case-by-case basis. A landlord may charge standard rates of interest of say 3% on the deferred rent but cannot charge the penalty rate of 12% which may have been in their lease agreement.
How long will the code be in force?
The principles are suggested to be applied ‘as soon as practicable’ however the Code will only come into effect ‘on a date to be defined’ in Victoria and remain until the Commonwealth JobKeeper program ceases operation.
We expect (but will confirm) that once the legislation is passed the Code will be given retrospective force to apply from 3 April 2020 when it was first discussed by the National Cabinet.
Should landlords be proactive?
Landlords should maintain open and frank communication with tenants and encourage an ‘open-book’ policy to monitor a tenant’s current vs past turnovers during the pandemic for the benefit of all parties. Obviously, if a tenant has been forced to close entirely (due to Government mandates) and cannot trade or make money by online sales or other means then such evidence may not be necessary but may be relevant in future to assessing the adequacy/frequency of the deferred rent payments.
Landlords should encourage their tenants experiencing financial hardship to complete an application form to ensure their eligibility under the code and facilitate negotiations (available here). Once an agreement is reached on the relief it should be formally documented by the parties.
If a landlord anticipates that it itself may be unable to provide the rent relief required by the Code they should ensure they have exhausted all avenues for their own financial assistance from mortgage repayments and tax relief and seek legal advices.
About Best Hooper – Victoria’s Property, Planning and Land Development Advisory Law Firm
Best Hooper are the oldest and most prominent developer focused law firm in Victoria who have served our community since 1886; through wars, recessions, depressions and pandemics. We are actively advising clients in relation to the COVID-19 outbreak on all property related matters including leasing, disputes, property transactions and planning advices and applications. We are continuously recognised as industry leaders in a variety of publications, including Doyles Guide and Best Lawyers.
If you require more information, please contact Giancarlo Romano, (03) 9691 0220 or email@example.com.
Giancarlo Romano is a Senior Associate in the Best Hooper Property Team who represents private and corporate landlords and tenants across commercial, retail and residential leasing and all facets of property transactions.
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