How to Negotiate a Commercial Lease During COVID-19
In response to the financial hit on retail, on 7 April 2020 Scott Morrison announced that a Code of Conduct known as the National Cabinet Mandatory Code of Conduct – SME commercial leasing principles during COVID-19 (“the Code”) would come into force to impose a set of good faith leasing principles to be applied in the negotiation of commercial tenancies between tenants and landlords. The Code outlines principles to be followed in negotiations with the overarching aim of promoting “the management of cashflow for small to medium enterprise tenants and landlords on a proportionate basis.”
What does principle-based mean?
The Code, being principle-based, does not prescribe hard or fast rules about how tenancies must be negotiated. Instead, it sets out principles to be followed in negotiations, with each party left to determine the measures and procedures on how to achieve outcomes in line with those principles.
Who does the Code apply to?
The Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million.
The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).
When does the Code commence and end?
The commencement date has not been set. That date may be different in each state and territory but will be a date following 3 April 2020.
The end date is for the period during which the JobKeeper Payment program remains operational. The JobKeeper programme is currently in place for 6 months from 30 March 2020.
What are the key provisions of the Code?
Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code.
Landlords must offer eligible tenants a rent reduction that is proportionate to the amount of the reduction in the tenant's turnover during the COVID-19 crisis period and subsequent recovery phase. The proportion is also to be consistent with the assessment criteria used when determining whether a tenant is eligible under the JobKeeper Scheme.
Part of the reduced rent may be deferred for payment after the end of such period. The amount of the deferment may be up to 50% of the total value of the reduction. The balance, being at least 50%, must constitute a waiver.
Any deferred rent must be amortised over the balance of the lease term, or 24 months, whichever is the greater, unless otherwise agreed between the landlord and the eligible tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
If negotiated arrangements under the Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant.
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.
Landlords must not draw on a 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 tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period.
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.
Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
The parties may have recourse to binding mediation where they are unable to agree the proportion of reduced rent which is to be waived and that which is to be deferred.
The Code sets out examples of the application of the principle of proportionality, noting the circumstance of each landlord, SME tenant and lease are different, and are subject to negotiation and agreement in good faith.
How Collaery Lawyers can help you
While the Code gives some protection to tenants, it does not address the full power imbalance between tenants and landlords. The reality is that with the COVID-19 crisis, the parties will not mediate any disputes regarding compliance with the Code any time soon.
Bernard Collaery has over 40 years acting for small and medium sized business owners. Our firm is unique in that our solicitors have strong litigation experience and can assert our client’s legal rights with vigour. We aim to maximise results in a cost-effective manner, offering flexible fee payments for struggling businesses.