Commerical Leases During Covid-19 Crisis

The mandatory code of conduct for commercial leases has been released and the main points are summarised below:

The code applies to an eligible business under the Jobkeeper program (this is basically a business that has had its income fall by 30% or more from a comparable period a year ago). There is also a requirement that the business must have a turnover of under $50 million.

The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).

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 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 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 fulfill 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.

Deferrals — rental payments must be spread over the remaining term of the lease and for no less than 24 months, whichever is the greater, unless otherwise agreed by both parties.

That means that if a tenant had three months remaining on a lease, they would still have at least 2 years to repay the deferred rent payments.

In a simple example if business is down 70% then the tenant may receive a 35% waiver and a 35% deferral

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.

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.

No fees, interest or other charges should be applied with respect to rent waived

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.

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.

Where 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 retail/commercial leasing dispute resolution processes for binding mediation.

Please contact us if you have any questions.

Important: Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not made available to any person without our prior approval.