On 7 April 2020, the Federal Government announced a mandatory Code of Conduct for Commercial Tenancies. The Code is a set of minimum requirements and principles by which commercial tenancies are to be governed during the COVID-19 pandemic period. These principles take into account the fact that landlords and tenants affected by the pandemic have a common interest to ensure the lease and the tenant’s business continues, and seeks to ensure mutually-satisfactory outcomes are achieved through good-faith negotiations.
We stress that at the time of writing although the Code is described as “mandatory” it is not yet law. The power to turn this Code into law is State-based; we must wait and see the practical effects the Code will have once the Queensland Government turns it into law. Nonetheless, the Code serves as a useful tool to begin negotiations between landlords and tenants on that basis that it will soon become the law.
Who does it apply to?
The Code will apply to those commercial, retail and industrial leases where the tenant:
- is eligible for the Federal Government’s JobKeeper program; and
- has an annual turnover of less than $50 million.
How long does it apply?
While the Code has been published by the Federal Government, it will not have practical effect until your relevant State Government turns it into law. However, once commenced the Code will run for the same length as the JobKeeper program which at the time of writing is in place for 6 months.
What are the principles for negotiation?
The Code states a number of principles to which landlords and tenants must adhere in negotiating rent relief and/or reduction:
- landlords are not permitted to terminate the lease, evict a tenant or draw on security (e.g. bank guarantee or security deposit) due to a failure to pay rent during the pandemic period;
- the tenant must otherwise comply with the lease terms;
- the landlord must offer the tenant rental relief proportionate to the loss in revenue suffered by the tenant during the pandemic period;
- at least 50% of the rental reduction must be in the form of a waiver, which means the tenant does not have to pay that amount at all (and the landlord is not entitled to recoup it);
- the remaining 50% of the rental reduction is to be in the form of a deferral, which means the tenant must pay that amount back after the pandemic period ends;
- the payment of the deferred component of the reduction must be done over a minimum period of 24 months, even if the lease ends before that date;
- appropriate (not punitive) interest may be charged on the deferred component of rent;
- any reduction the landlord receives in statutory charges, insurance or deferrals in loan repayments from their bank must be passed on to the tenant in a proportionate manner;
- the landlord is to waive recovery of expenses such as cleaning or marketing levies if the tenant is not trading;
- no rent increases to be applied during the pandemic period;
- a tenant will not be in breach of the lease if they reduce or cease trading during the pandemic period.
These principles are considered to be binding if the tenant satisfies the criteria outlined above, but also provide a good platform for negotiations for any commercial tenant.
These are minimum principles. If landlords and tenants want or need to “go above and beyond” to ensure that the tenant’s business remains viable and the lease can continue, the Code encourages them to do so. Additionally, the definitions of “waiver and deferral” in the Code are broad, and can include a variety of negotiated outcomes.
Can I have an example?
An example of how the Code is to work is set out as follows.
Tenant Co Pty Ltd has leased its commercial offices from Landlord Enterprises Pty Ltd until December 2021. Tenant Co Pty Ltd pays $30,000.00 a month in rent.
Tenant Co Pty Ltd is eligible for the JobKeeper program and has an annual turnover of $1 million. By showing Landlord Enterprises Pty Ltd its financial accounts for the last two years, Tenant Co Pty Ltd is able to demonstrate that it has suffered a 30% downturn in revenue due to the COVID-19 pandemic.
The Code requires that Tenant Co Pty Ltd and Landlord Enterprises Pty Ltd negotiate the terms of a rent reduction which is at least proportional to the loss in revenue. With 30% of the total rent payable being $9,000 a month, they can agree:
- 15% of the total rent payable is waived (i.e. the landlord waives $4,500 a month that it cannot recover);
- 15% of the total rent payable is deferred until after the pandemic period ends (i.e. $4,500 a month is deferred); and
- Tenant Co Pty Ltd continues to pay the balance 70% of the total rent payable.
Let’s say the pandemic period ends in August 2020. The deferred rent is then paid off in instalments over the next two years to August 2022. Even though the lease ends in December 2021, Tenant Co Pty Ltd must still continue to pay off the deferred rent.
How will negotiations be formalised?
We recommend that any negotiated outcome that complies with the Code be formalised in the form of a deed which both parties sign. Given the potential length of the pandemic period and the potential sums of money involved, it is important that clarity and enforceability is given to the terms of any negotiated resolution. This is especially the case where the lease ends before the time the deferred rent is to be paid back (as in the above example). In those circumstances, landlords will want the agreement to reflect that the deferred rent is to be repaid and potentially security held for non-payment.
Please contact your property agent or Wilson Lawyers if you would like assistance formalising any negotiated agreement, or if you have any questions or concerns.**
The full text of the Code can be found here.
**The information in this article is current as at 9 April 2020. It is for general purposes only, and reflects a rapidly-changing situation. The actual laws enacted by the State Government may vary the effect of the Code as set out in this article. Consequently, this article is not intended to constitute legal advice.