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Commercial Landlords and Tenants: impacts of pandemic lockdowns

April 9th, 2020

The Commonwealth Government yesterday announced the mandatory code of conduct for commercial leasing.

The code is intended to alleviate the impact of government implemented measures to combat the COVID-19 pandemic.

To be eligible for the code to apply, an individual, business or company must show:

  1. a 30% reduction in revenue compared to a similar time last year; and
  2. an annual turnover of less than $50 million.

Businesses eligible for the JobKeeper program are automatically eligible for the code of conduct.

The code encourages tenants and landlords to adhere to, and apply as soon as practicable, good faith leasing principles for the duration of the code, which will remain in place as long as the JobKeeper program remains in place.

Among those principles are:

  1. landlords must not terminate leases due to non-payment of rent during the period of the COVID‑19 pandemic and a reasonable subsequent recovery period;
  2. tenants must remain committed to the terms of their lease, and a failure to abide to the terms of the lease may forfeit any protection by the code;
  3. landlords must offer tenants a reduction in rent proportionate to the downturn in the tenant’s business, this is likely to be between 30% and 100% of the rent;
  4. at least half of the reduction must be a waiver of rent, with the remainder able to be a deferral, where the tenant pays it to the landlord over the remaining term of the lease (or a minimum of 24 months);
  5. landlords should also pass on where practicable the effects of any financial assistance received, including alleviation of loan repayments;
  6. landlords should where appropriate seek to waive recovery of other expenses and outgoings against tenants, and can choose to reduce services provided to the tenants;
  7. landlords must not draw on a tenant’s security for the non-payment of rent during the period of the code;
  8. the tenant should be provided with the option to extend the lease for the same period as it was non-trading; and
  9. landlords must freeze rent increases (except for those based on turnover rent) for the period of the pandemic.

If agreement cannot be reached between the landlord and the tenant as to the above arrangements (including as to the amount of any waiver), the matter must be referred to mediation.

The measures prescribed above, and others in the code, seek to ensure that businesses are able to survive and continue trading when the pandemic reaches its end.

The code has an effective date as of 3 April 2020, but will not apply in Queensland until such time as it is enacted by parliament.  There is no prescribed time for this, but it is expected to be as soon as possible.

The code will only cease to apply when the JobKeeper program no longer applies and the pandemic is deemed to be over.

While this announcement will bring welcome relief for tenants, its implications in the long run may be uncertain. If you have any questions or concerns regarding your rights and obligations under the Code, you should contact our experienced commercial and property law team as soon as possible.

 

Checklist for Commercial Tenants

  • Get your business records in order so that you can demonstrate the impact of the COVID-19 measures on your business;
  • Speak to your accountant about the financial impact, and what can be done to minimise it and allow you to recover;
  • If applicable, register for the Jobkeeper Program;
  • Consider what you are realistically going to be able to do financially over the next six months or so, and come up with a proposal regarding the lease. Make sure it is fair, and is able to be justified based on your business records.  It may be useful to involve your accountants and lawyers in this process;
  • Start negotiations with your landlord to try to find an acceptable solution for both of you to get through this difficult period. Bother parties need to be honest and negotiate in good faith.
  • Do not just stop paying rent or expect your landlord to stop charging rent and outgoings. Doing so will mean that you lose the protection the government is offering.
  • Ensure that any agreed outcome is recorded in writing, and that changes to the leases are reflected in formal, enforceable documentation. Your lawyers should be engaged to do this.

 

Checklist for Commercial Landlords

  • Be pro-active. Contact your tenants and see how they are impacted.  Starting early might make the situation more manageable rather than waiting until there are few options left.
  • Speak with your bank about what your options are if the tenants are unable to pay the full rent. Can the bank help with repayment holidays or converting to interest only, or other measures?
  • Consider your outgoings and other holding costs – are there savings or deferrals which may be available?
  • If your tenants are adversely impacted, ask them to show you some financial information to show what that impact is, and what sort or relief they may be looking for;
  • Engage in negotiations with the tenant. Remember that you will both have an obligation to negotiate honestly and in good faith, and that is it likely to be better to have a viable tenant at the end of pandemic period, than be looking for a new tenant in what is likely to still be a difficult market.
  • Ensure that any agreed outcome is recorded in writing, and that changes to the leases are reflected in formal, enforceable documentation.  Your lawyers should be engaged to do this.
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