Commercial Leasing Principles during COVID-19 explained
The Federal Government has introduced the National Cabinet Mandatory Code of Conduct to cover commercial lease agreements, and as Smallwoods Lawyers explains, the overarching principle is that the parties must negotiate in good faith.
What's the purpose of the Code of Conduct?
The main objective is to aid the management of cash flow for SME (Small to Medium Enterprise) tenants and landlords on a proportionate basis due to the impact of COVID-19.
What is expected of both parties?
Both the landlord and tenant are expected to provide sufficient and accurate information to each other to achieve outcomes consistent with the Code. After providing that information any arrangements should take into account the impact on revenue, expenses and profitability.
The period covered by the deferral/waiver of rent must include a reasonable period to enable the tenant to recover business. Tenants must remain committed to the terms of their lease (subject to any amendments to the rental agreement negotiated under this code). Any material failure to abide by substantive terms of the lease will forfeit any protections provided to the tenant under the code. Therefore, it is important to check whether there are any outstanding breaches by the tenant of its existing lease. However, this does not include the tenant having to abide by proscribed opening hours as most tenancies in shopping centres contain.
What are some of the responsibilities of the landlord?
Importantly, once an agreement is reached by way of a reduction in rent, there must be a permanent waiver of that rent being no less than 50 per cent of the deferrment agreed to. This means that 50 per cent (or greater percentage) will never be recoverable.
The recoverable deferred rent must be spread over the balance of the lease term or for a period of no less than 24 months - whichever is greater (unless the parties agree otherwise). One possibility would be a trade-off to provide a greater deferral, provided it is repaid over a shorter period. This is a matter for agreement between the landlord and tenant.
If a landlord receives any deferral of loan repayments then the landlord is expected to share those with the tenant.
If landlords and tenants cannot reach agreement the matter should be referred to the appropriate agency for binding arbitration. However, in doing so, this process must not be used to prolong or frustrate an amicable outcome.
If the lease is due to expire before the 24-month term any negotiations should be in the context of negotiating a variation to the terms of the lease or a new lease (if the landlord is satisfied with the tenant). The Code states that the tenant should be provided with the opportunity to extend their lease for an equivalent period for which there is a rent waiver or deferral. This is to provide the tenant additional time to trade on existing terms after the end of the pandemic.
When are repayments expected to begin?
It is important to note that any repayment period should not commence until either the COVID-19 pandemic period has ended as declared by the Australian government or the date the existing lease is due to expire.
The Code also calls for a freeze on rent increases during a pandemic and for a reasonable recovery period.
When is a tenant obliged to trade?
It is clear that the tenant has an obligation to trade within the restrictions imposed by the government.
For example, a café which supplied both eat-in meals and takeaway should continue a takeaway service and trim staff and outgoings accordingly under the current restrictions, provided that formed a reasonable part of the tenant's trade before the restrictions were imposed. As a landlord you should ask to see the tenants financial information
There are other provisions regarding outgoings payable by the tenant. During any rent deferral/waiver period, outgoings under the lease will only be payable in proportion to the reduction in rent.
What amounts to financial distress?
Only SMEs suffering financial distress as a consequence of COVID-19 are covered by the Code. Any tenant eligible for the federal government’s Job Keeper payments are automatically considered to be in financial distress. However, that does not preclude tenants who can show financial distress by other means.
Smallwoods has a special deal for SMEs
To assist commercial tenants and landlords, Smallwoods will provide a half-hour telephone conference for any small to medium business and landlords for $175 plus GST who would like to discuss approaches to a landlord or a response to a tenant following a request to negotiate.
Smallwoods Lawyers was established in 1976. Over the past 44 years we have gained an enviable reputation as a quality law firm, providing legal services in the areas of business and commercial law, family law and estate planning.
For more information head to: https://www.smallwoods-srp.com.au/
Phone 9939 3446