COVID-19 | Landlords and Tenants what do you do?
By Phillip Leaman
8 April 2020
Some clarity to deal with COVID-19 - Don’t get it wrong!
The Prime Minister has just announced a COVID-19 Mandatory Code for Commercial Tenancies. But what is it and how is it implemented?
As leasing experts, we note that it is a difficult and uncertain time for landlords and tenants. For the last few weeks, the Government has indicated that something will be legislated to deal with the problem that some tenants can not pay rent and landlords still need to pay mortgages. Whilst this is an ever changing landscape, we set out below some guidance for landlords and tenants in this uncertain time.
The new code is proposed to be adopted through each State’s respective legislation on COVID-19 shortly.
The purpose of the Code is to share the pain. The Code explains that: “Any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period”.
Whilst, Victoria has yet to pass the legislation, the Code provides the following leasing principles:
- 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 this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case by case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- 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.
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case by case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
- 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 this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
- No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
- 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 outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
- 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.
So what if a landlord and tenant can not agree on a solution?
If the parties’ lawyers cannot help the parties reach agreement, either the Landlord or the Tenant should lodge a dispute with the Small Business Commissioner and seek a mediation. However, any attempt to use mediation to prolong or frustrate the process will be in breach of the code.
So what does Financial stress or hardship mean?
Your business either cannot meet its financial or contractual commitments due to the COVID-19 pandemic (including government restrictions) and/or you are eligible for the Jobkeeper Program.
When does the Code start?
On a date to be fixed by the Victorian Parliament (in relation to Victoria) after 3 April 2020 and will continue until the Jobkeeper Program ends.
How do I get a copy of the Code?
For a copy of the Prime Minister’s Code click here.
For any leasing questions, feel free to get in contact.
What do I do now?
It is important to get legal advice from an expert and have any agreement documented carefully. We have developed an excellent Rent Deferral/Rent Abatement Deed which takes into consideration COVID-19 which can be adapted to each circumstance and each lease situation. COVID-19 will be temporary, however the lasting impact may take a while to get over. It is important that agreements are documented carefully to take into consideration the present but also the future including future changes to the landlord and tenant’s interests (such as a sale of the land or a transfer of the tenant’s business).
Don’t rely on email correspondence for any agreement. Document it properly. A poorly drafted document or agreement will have a longer lasting impact that COVID-19.
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