News – Commerical leasing Principles during COVID-19

National Cabinet Mandatory Code of Conduct: Commercial Leasing Principles During COVID-19[1] 

The Code is a set of overarching principles to guide arrangements and negotiations between landlords and tenants. The Code will be enacted and regulated via state and territory legislative instruments.[2] The Code will last while the COVID-19 Commonwealth Government’s JobKeeper programme  remains operational. 

The Code provides that: 

• It applies to a tenant that is an eligible business for the JobKeeper program (i.e. the tenant has an annual turnover of less than $50 million and a 30% or greater loss in revenue). Notwithstanding this, the principles of the Code should apply in spirit to all leasing arrangements for affected businesses during the COVID-19 pandemic. 
• Its objective is to share the financial risk and cash flow management proportionately between tenants and landlords during the pandemic, and arrangements should be appropriate for a subsequent reasonable recovery period. 
• If the parties genuinely cannot agree on leasing arrangements, the matter should be referred to applicable dispute resolution processes. 

The overarching principles of the Code include: 

• The parties should act in a transparent manner and provide each other with sufficient information to achieve outcomes consistent with the Code. 
• Arrangements agreed under the Code will take into account the impact of COVID-19 on tenants, with specific regard to tenants’ revenue, expenses and profitability. 
• The parties will assist each other in their respective dealings with stakeholders (i.e. banks). 
• Landlords should agree to a tailored approach for tenants on a case-by-case basis. 

The leasing principles of the Code include: 

1. During the COVID-19 period and the recovery period:

a. landlords must not terminate leases due to non-payment of rent; 

b. landlords must not draw upon financial security and guarantees in leases for non-payment of rent; 

c. landlords agree to a freeze rent increases (except for retail leases based on turnover rent). 

1. In relation to rent reductions and repayments: 

a. landlords must reduce up to 100% of tenants’ rent in the form of waivers and deferrals proportionate to the reduction in the relevant tenants’ trade during the COVID-19 period and the recovery period. Waivers and deferrals can be interpreted to include other agreed variations to existing leases (such as pausing and/or hibernating leases) or other commercial outcomes. Landlords may not recoup a reduction provided by waiver during the term of the lease. Proportionate means rent relief proportionate to reduction in trade as a result of COVID-19 plus the recovery period, consistent with assessments undertaken for eligibility for the JobKeeper program; 

b. rent waived must form at least 50% of rent reductions and should constitute a greater proportion in cases where failure to do so would compromise tenants’ capacity to fulfil ongoing obligations under leases. Regard must be had to landlords’ financial ability to provide such additional waivers. Tenants can waive the requirement for a 50% minimum waiver by agreement; 

c. payment of rent deferrals by tenants must be amortised over the balance of the lease term and for no less than twenty-four months, whichever is greater, unless otherwise agreed; 

d. landlords should allow tenants to extend leases for periods equivalent to the relevant waiver and/or deferral periods in order to provide tenants with additional time to trade on existing lease terms during the recovery period; 

e. where arrangements negotiated under the Code necessitate repayments, no repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the relevant existing lease expiring, and taking into account the recovery period. 

1. tenants must continue to comply with their lease obligations, subject to any rental agreement negotiated under the Code; and tenants’ material failure to abide by any substantive terms of leases will result in forfeiture of the protections under the Code; 
2. landlords must pass on to tenants, proportionately, any reduction received in statutory charges (i.e. land tax and council rates); 
3. where appropriate, landlords should waive recovery of any other tenant expenses and outgoings during periods that tenants are not able to trade; 
4. no interest, fees and charges should be applied by landlords on deferrals and waivers; 
5. landlords may not apply any prohibition and levy penalties if tenants reduce opening hours or cease to trade due to COVID-19. 

Parties should negotiate in good faith on the basis of the Code and legislative instruments, bearing in mind that it appears the legislative instruments will apply to leases from 30 March 2020, in line with the commencement of the JobKeeper programme, as seen in the South Australian Act.   

Some examples of proportionality extracted from the Code: 

A 60% loss in turnover would result in a guaranteed 60% cash flow relief. At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen. Up to half could be through a deferral of rent, with this to be recouped over at least twenty-four months in a manner that is negotiated by the parties. 

So if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral. 

Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected tenant to recover from the crisis.

Please Note: This is general information distilled from the Code referred to herein and does not constitute legal advice, and it should not be relied upon in lieu of legal advice.

Written by Kim Cousins, Associate, Commercial Law Division

– Kim Cousins
kim@oreillystevens.com