The Prime Minister yesterday announced a mandatory code for commercial tenancies to guide landlord and tenant negotiations during the COVID-19 pandemic.
The code imposes “good faith leasing” and “proportionality” principles that will be legislated by the States and Territories. If landlords and tenants cannot reach agreement on a rent reduction then either party may refer the dispute for binding mediation to the applicable existing State or Territory retail/commercial leasing dispute resolution process.
To be eligible to negotiate under the code, a tenant must:
- have a turnover of no more than $50 million; and
- be eligible for the JobKeeper program (ie at least a 30% drop in revenue due to COVID-19 restrictions).
This eligibility criteria means that the code will not apply to so-called ‘national chain’ tenants.
The application of this criteria becomes a little muddled for franchised arrangements. The code may not apply where the tenant is the franchisor (which may have a turnover which exceeds $50 million) but it is likely to apply where the tenant is the franchisee.
The objective of the code is to share, in a proportionate and measured manner, the financial risk and cashflow impact during the COVID-19 period and, at the same time, balance the interests of landlords and tenants.
It is intended that landlords will agree to tailored temporary arrangements for each tenant to whom the code applies which takes account of each tenant’s particular circumstances.
The principles of the code, which are to be applied as soon as practicable and on a case-by-case basis are as follows:
- a landlord must not, during the COVID-19 pandemic period (or a reasonable subsequent recovery period), terminate a lease due to non-payment of rent;
- a tenant must remain committed to the terms of its lease subject to any agreed rent reductions – material failure by a tenant to comply with the substantive terms of its lease will result in the tenant forfeiting protection under the code;
- a landlord must offer each of its tenants a proportionate reduction in rent in the form of waivers and deferrals of up to 100% of the rent payable under the lease based on the tenant’s trade during the COVID-19 pandemic period (and a reasonable subsequent recovery period);
- rent waivers must (unless the tenant otherwise agrees) comprise at least 50% of the reduction;
- rent deferrals must (unless otherwise agreed) be amortised over the greater of:
- 24 months; and
- the balance of the lease term;
- any reduction in statutory charges or insurance that a landlord obtains is to be passed on to the tenant;
- a landlord should seek to share any benefits received due to deferral of loan payments from its financier with its tenants in a proportionate manner;
- landlords should, where appropriate, waive recovery of outgoings payable by tenants under their leases during the period that tenants are not able to trade;
- repayment of any rent deferral should cover an extended period to avoid placing undue financial burden on a tenant;
- no repayment of a rent deferral is to commence until the earlier of:
- the COVID-19 pandemic ending (as determined by the Federal Government) taking into account a reasonable subsequent recovery period; and
- the expiry of the lease;
- no fees, charges or interest are to be payable by a tenant;
- a landlord must not draw on any security given by a tenant under its lease during the COVID-19 pandemic period or a reasonable subsequent recovery period;
- a tenant should be given an opportunity to extend its lease for an equivalent period to the rent waiver/rent deferral period;
- a landlord must not increase the rent (except where based on turnover) during the COVID-19 pandemic period and a reasonable subsequent recovery period; and
- a landlord must not impose any penalty on a tenant if it reduces its trading hours or ceases to trade during the COVID-19 pandemic.
To illustrate how we see the code applying, we have set out two examples below:
Example 1
Assume:
- the tenant fulfils the eligibility criteria for the code to apply;
- the tenant has a 5 year lease which commenced on 1 July 2018;
- the rent is currently $120,000 pa subject to 4% increases on each 1 July;
- the COVID-19 pandemic period (together with a reasonable subsequent recovery period) is 6 months commencing on 1 April 2020;
- the tenant ceased trading due to COVID-19 on 31 March 2020 and will re-commence trading on 1 October 2020;
- the landlord and the tenant agree that the tenant is to be given:
- a rent reduction under the code comprising 50% rent waiver and 50% rent deferral; and
- the rent deferral is to be amortised over the balance of the term of the lease.
Consequently, the repayment of the rent deferral will be $909.09 per month (ie $10,000 per month for 3 months amortised over the remaining 33 months of the term) so that the rent payable by the tenant would be as follows:
- nil for the months of April to September 2020; and
- $11,309.09 per month for October 2020 to June 2021 (note 4% rent review was due on 1 July 2020 but, due to the code, is deferred to 1 October 2020);
- $11,725.09 per month for July 2021 to 30 June 2022; and
- $12,157.73 per month for July 2022 to 30 June 2023.
Example 2
Assume as above except that:
- the tenant continues to trade but is able to establish a turnover reduction of 40% due to COVID-19 so that the tenant is entitled to a 40% rent reduction;
- the landlord and the tenant agree that the tenant is to be given:
- a 40% rent reduction under the code to be split equally between rent waiver and rent deferral; and
- the rent deferral is to be amortised over the balance of the term of the lease.
Consequently, the repayment of the rent deferral will be $363.64 per month (ie 40% x $10,000 per month for 3 months amortised over the remaining 33 months of the term) so that the rent payable by the tenant would be as follows:
- $6,000 per month for the months of April to September 2020 (ie 40% rent reduction); and
- $10,763.64 per month for October 2020 to June 2021 (note 4% rent review was due on 1 July 2020 but, due to the code, is deferred to 1 October 2020);
- $11,179.64 per month for July 2021 to 30 June 2022; and
- $11,612.28 per month for July 2022 to 30 June 2023.
The difficulty that landlords and tenants face is that the period that COVID-19 lasts is unknown. Consequently, the best that landlords and tenants can do is agree on a framework and deal with the accounting issues on a month to month basis. For those landlords who have many multi-tenanted properties, the accounting logistics appear daunting.
Given that the agreement between the landlord and tenant will be in place for an unspecified period of time, we recommend that an agreement be entered into between the parties to confirm the terms.
Without a signed agreement, there is a risk that parties could dispute the agreed terms in the future. A signed agreement lessens the likelihood of this occurring.
Thynne + Macartney has already prepared a number of these agreements and is able to assist you with your own agreement for a fixed price.
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If you think you have been impacted by the COVID-19 rent relief package, click here to download our checklist to get started.
Should you have any questions or wishes to discuss your specific situation, we are available to work through the steps to determine how the framework will apply to you.