Mandatory code for commercial and retail leases
In an effort to help those landlords and tenants who are suffering financial stress or hardship as a result of the COVID-19 pandemic, the National Cabinet has introduced a “mandatory code” (Code) which imposes a set of good faith leasing principles for landlords and tenants to use as a basis for managing any temporary arrangements that are required as a result of a downturn in their particular circumstances.
The Code applies to commercial tenancies (including retail leases, office leases and industrial leases), not residential tenancies (as residential tenancies are regulated by State and Territory legislation) and the overarching principle behind the Code is that it seeks to ensure that the burden of a tenant’s decline in turnover is shared proportionately between the landlord and tenant.
The key to applying the Code is that the relief provided to a tenant must be “proportionate” to the actual reduction of the tenant’s income. The Code also prescribes that at least 50% of the relief provided must take the form of a wavier of rent.
Eligibility for tenants
To participate in the Code, a tenant with an annual revenue of $50m or less must be eligible for the “JobKeeper Program”, which requires a minimum 30% reduction in turnover. There are various other eligibility criteria for tenants with annual revenue exceeding $50m.
Read JobKeeper Payment Package for Doctors | employers & self-employed must act now for more information.
Whilst the Code seeks to cover a broad subject area, set out below is a summary of the types of relief that may be open for negotiation and sought. Note that any relief sought, whilst it must include a waiver of rent, can also include any combination of the 10 measures set out below which offers the best possible support for the tenant, given their particular circumstances. Accordingly, the relief package must be “customised”:
- Deferred rent:
For any portion of the relief which takes the form of deferred rent, the deferred amount must be amortised over the remaining term of the lease but not less than 24 months;
- Hold on termination:
Landlords may not terminate leases for at least 6 months for default associated with non-payment of rent;
- Prohibition on drawing on security deposits:
Landlords may not draw on security deposits for at least 6 months for default associated with non-payment of rent;
- Reduction of statutory charges to be passed on:
Any reduction in statutory charges (e.g. rates etc) usually incurred by the landlord must be passed onto the tenant;
- Limit on charging outgoings:
Landlords should endeavour to reduce or eliminate the charging of outgoings during any period the tenant is not able to trade from the premises;
- Fee relief:
No fees, charges or interest should be charged by landlord in respect of rent waived or deferred or in respect of any other arrangement entered into;
- Extended terms:
If tenants request it, landlord should allow an extension of the lease for a term equivalent to the rent relief period;
- Frozen rent reviews:
Rent reviews are frozen for the time being and for a reasonable recovery period;
- Prohibition on default:
Landlords cannot action any default which may arise through changed trading hours / cessation of trade during the period of restrictions; and
- Prohibition on subsequent recoupment:
Amounts agreed as waived cannot be subsequently recouped by a landlord.
The Code should be used now in facilitating the discussions between landlord and tenant and to reiterate, the underlying tone of these discussions should be conducted in “good faith” with a view to reaching an agreement about the most appropriate rent relief based on the particular circumstances.
Recommendations for landlords
For landlords who have lending facilities on foot for commercial / retail premises, the recommendation would be to explore whether any of the relief offered by your lender is available to you, for example banks are offering businesses with loans of up to $10m in total loan facilities have been offered a 6 month deferral on repayments for loans attached to their business. If this relief is available to you as a landlord, this can help facilitate the relief you can offer to your tenants.
Landlords should also explore the relief available to them for land tax.
Land tax relief
In Victoria, landlords of commercial or retail property leases who provide tenants impacted by COVID-19 with rent relief may be eligible for a 25% reduction on the property’s 2020 land lax. To be eligible, the property must be rented to a tenant with an annual turnover of up to $50m and the tenant must be eligible for the JobKeeper payment. Relief is also available to land owners who are unable to secure a tenant because of COVID-19, provided certain conditions are met.
Tenants who are currently under a commercial / retail lease tenancy
For tenants,, you should discuss your financial circumstances with your accountant to determine how your business is likely to be impacted financially by COVID-19 in the coming months and to keep a record of any decisions made and supporting documentation evidencing the financial impact. If you are eligible for the JobKeeper payment, you will then need to determine whether you wish to request rent relief and initiate a discussion about this with your landlord pursuant to the Code.
Whilst a landlord and tenant are free to discuss the Code directly, a commercial lawyer can assist landlords and tenants with negotiating an outcome that is mutually agreeable and ensuring that this is documented correctly.
The team at Fletcher Clarendon can help shed some light on all of these complex matters, enquire here or speak to your DPM Consultant who can make an introduction.