The Prime Minister announced yesterday the introduction of The Mandatory Code of Conduct (the Code). The Code sets out a series of guidelines for negotiated solutions to financial distress caused by the COVID-19 crisis in the commercial leasing context.
It addresses, among other things, tenant relief eligibility requirements, mandatory rent waivers/deferrals and how these are calculated, non-termination rights and compulsory mediations.
The Code is to be implemented by way of state-by-state legislation or regulations, as appropriate. It will come into effect on a date after 3 April 2020.
DOES THE CODE APPLY TO YOUR LEASE?
The purpose of the Code is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between landlords and tenants, in circumstances where the tenant is:
- a small-medium sized business (annual turnover of up to $50 million); and
- is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.
Tenants will be eligible for the JobKeeper subsidy if, at the time of applying:
- their business has an annual turnover of less than $1 billion and they estimate their turnover has fallen or will likely fall by 30 per cent or more; or
- their business has an annual turnover of $1 billion or more (or is part of a consolidated group for income tax purposes with turnover of $1 billion or more) and they estimate their turnover has fallen or will likely fall by 50 per cent or more.
For tenants that are not eligible for the JobKeeper Program or have a turnover of more than $50 million, the Code will not apply.
MANDATORY LEASING PRINCIPLES
While the Code has not yet become legislation in Victoria, the following leasing principles as prescribed by the Code should be applied as soon as reasonably practicable and in the most appropriate manner in light of the specific leasing arrangement:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- Tenants must comply with their obligations under the lease, subject to any amendments to payment of rent as negotiated under the Code. It is important to note that a material failure to abide by substantive terms of a 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 based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
a. Rental Waivers: A waiver of rent means that rent is not payable for that period and it cannot be recovered by the landlord at a later date. Under the Code, rent waivers must constitute no less than 50% of the total reduction in rent payable during the COVID-19 pandemic period. It is stated that this amount should be increased where it affects the tenant’s capacity to fulfil its other obligations under the lease however, regard must also be had to landlord’s financial ability to provide such additional waivers. Tenants can agree to waive the 50% minimum by agreement.
b. Rent Deferral: A deferral of rent suspends the obligation to pay rent to a later date at which point it is equally applied over the balance of the term or at least over the next 24 months (whichever is greater). The parties can come to another agreement.
Where the tenant’s revenue has fallen by 100%, then at least 50% of the rent for the COVID-19 period is waived and the balance is applied as a rent deferral.
Where the tenant’s revenue has fallen by 30%, the rent payable will be reduced by 30%. At least half of the amount of that reduction will be waived, and the balance will be deferred.
- Where rent is deferred or waived, the landlord should not claim fees, interest or other charges from the tenant.
- Where the agreements negotiated in light of the Code require repayment of a sum at a later date, such repayment should occur over an extended period of time, as mentioned above under point 3(b), and should not commence until the earlier of the COVID-19 pandemic period ending or the existing lease expiring.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period to allow it additional time to trade.
- Landlords must not draw on a tenant’s security for non-payment of rent during the COVID-19 pandemic period and /or a reasonable subsequent recovery period.
- Rent increases (except for retail leases based on turnover) are frozen for the COVID-19 pandemic period and a reasonable subsequent recovery period. The parties may nonetheless mutually agree that rent will increase under the terms of the lease.
- Any reductions in statutory charges (for example land tax, council rates etc) or insurance will be proportionally passed onto the tenant.
- Landlords should seek to share any benefit due to a deferral of loan payments with the tenant in a proportionate manner.
- Landlords, where appropriate, should seek to waive recovery for any other expenses or outgoings during the period the tenant is not able to trade.
- Landlords may not apply any restrictions, levies or penalties if the tenant reduces its opening hours or ceases to trade during the COVID-19 pandemic.
Where parties cannot reach an agreement, the matter should be referred to the relevant State or Territory Small Business Commission or Ombudsmen for binding mediation of the arrangement. We will need to see what further information the legislation gives regarding this mediation process.
ACCESS TO AND PROVISION OF INFORMATION
Landlords and tenants are to act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the Code.
This means if you are a landlord, you are within your rights to request information generated from an accounting system, and information provided to and/or received from a financial institution, that demonstrate the level of financial stress experienced by the tenant as a direct result of the COVID-19 event and the tenant’s reduction in revenue.
If you are tenant, you need to be prepared to substantiate that the rent reduction/waiver being sought is proportionate to your decrease in revenue over recent months as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions).
GET LEGAL ADVICE
Landlords and tenants should obtain legal advice from an expert and have any agreement documented carefully to ensure it complies with the rapidly changing legal landscape.
Pointon Partners has developed a comprehensive COVID-19 Lease Variation Document which can be adapted to each circumstance and each lease situation. 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.
Whether you are a tenant or a landlord, if you are seeking assistance as to how to best proceed in this uncertain environment please contact us on (03) 9614 7707.