In our previous update, we outlined some of the measures the Prime Minister intended to implement to provide support and relief for commercial tenants and landlords in financial distress as a result of the COVID-19 crisis.
On 7 April 2020, the National Cabinet announced a mandatory code of conduct (click here) (Commercial Tenancies Code) to be legislated and regulated by each of the State and Territory Governments.
The Commercial Tenancies Code is intended to mandate a set of good faith principles to be applied to commercial, retail and industrial leases where the tenant is eligible for the Commonwealth Government’s JobKeeper assistance and is a small or medium sized enterprise (with an annual turnover of up to $50 million).
The objective of the Commercial Tenancies Code is for a landlord and tenant to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 crisis, whilst seeking to balance the interests of the landlord and tenant. It is expected that a landlord and each eligible tenant will negotiate a tailored, bespoke and appropriate temporary arrangement, on a case by case basis.
The following leasing principles should be applied in negotiating and enacting appropriate temporary arrangements between a landlord and tenant under Commercial Tenancies Code:
- A landlord must not terminate a lease for non-payment of rent during the COVID-19 crisis or a reasonable recovery period.
- A landlord must not claim on upon a tenant’s security (bank guarantee, security deposit or personal guarantee) for non-payment of rent during the COVID-19 crisis or a reasonable recovery period.
- A landlord must freeze rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 crisis and a reasonable recovery period.
- A landlord must not impose any penalties or prohibition against the tenant reducing its opening hours or ceasing to trade due to the COVID-19 crisis.
- A landlord must offer the tenant a rent reduction proportionate to the trading reduction in the tenant’s business over the course of the COVID-19 crisis, through a combination of waivers of rent and deferrals of rent (Rent Relief).
- Waivers of rent must account for at least 50% of the Rent Relief.
- Deferrals of rent must be covered over the balance of the lease term and in a period not less than 24 months following the COVID-29 crisis. (Note there is some confusion between the Commercial Tenancies Code and the Prime Minister’s statement of 7 April 2020. The Prime minister mentioned a period of 12 months, not 24 months).
- A landlord must not charge any fees, interest or other charges to the tenant with respect to waivers and deferrals of rent.
- A landlord must pass on to the tenant (with appropriate proportionality as applicable under the terms of the lease) any reductions in statutory charges, such as land tax, council rates and insurance.
- A landlord should, where appropriate, waive (or otherwise reduce) recovery of any other expense by the tenant during the period the tenant is not able to trade. A landlord is entitled to reduce services in these circumstances.
- A landlord should seek to share any benefit the landlord receives from its bank due to a deferral of loan payments, with the tenant in a proportionate manner.
- A tenant must honour the terms of the lease, as amended in accordance with negotiations under the Commercial Tenancies Code. If the tenant breaches the substantive terms of the lease in a material way, the tenant will forfeit any protection provided to the tenant under the Commercial Tenancies Code.
- A tenant should be provided with an opportunity to extend its lease for the equivalent period of the waiver or deferral period. This is intended to provide the tenant with additional time to trade on the existing lease terms during the period after the COVID-19 crisis.
- If negotiated arrangements under the Commercial Tenancies Code involve repayment by the tenant, this should occur over an extended period to avoid placing an undue burden on the tenant.
If a landlord and tenant cannot reach an agreed position on alternative leasing arrangements as a direct result of COVID-19, the matter should be referred to a binding mediation process overseen by the relevant State or Territory Government.
In addition, the Prime Minister urged banks to cooperate by coming to the table to offer support and co-operation to landlords in order to preserve leases.
In the coming days, we expect further details from the State and Territory Governments regarding the application of the Commercial Tenancies Code in each relevant jurisdiction.
We will keep you updated as further details comes to hand.
The Commercial Tenancies Code does not apply to residential leases. Further work is required in this regard.
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the Swaab Property Team