Commercial Leasing Code of Conduct During the COVID-19 PandemicThe Prime Minister has recently announced an obligatory code which landlords and tenants must follow when negotiating amendments to leases due to the COVID-19 pandemic. The guiding principle is that any agreement must share the pain between the landlord and tenant and any agreement to repay rental must be spread over sufficient time for the tenant’s business to support any repayment. The Victorian Parliament will pass legislation to bring the principles into law in the near future. It is critical that any agreement between tenant and landlord is recorded in a deed of variation that reflects the agreement. Do not rely on an exchange of emails as any mistake or vague term could cause the parties pain long after the COVID-19 pandemic is over.
When does the obligatory code start?The Victorian Parliament will set a date that is sometime after the 3rd of April 2020. We expect the Code will commence very soon.
The details of the codeIn negotiating and enacting appropriate temporary arrangements under this Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis:
- 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 or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
Binding mediationWhere landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to the Victorian Small Business Commissioner. Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
Who does the code apply to?The Code applies to tenancies where the tenant turns over less than $50 million and is in financial distress. A tenant which is eligible for the JobKeeper program or otherwise cannot meet its financial commitments is defined as under financial distress.
Where to from here?Please contact Will Elder to discuss any queries that you have. It is important that you get legal advice before finalising any agreement to ensure the agreement is legal and properly recorded in a well-drafted deed. We already have an effective deed of variation prepared that can be amended to reflect individual agreements between landlords and tenants. If you have any queries at all please get in touch.
Will has developed a broad commercial practice in which he advises clients on business acquisition and sale, commercial agreements, commercial and retail leasing, and commercial litigation. Learn more about Will's legal experience.