UPDATE: CHANGES AFFECTING COMMERCIAL LEASES
The National Cabinet recently introduced a mandatory National Code of Conduct (Code) to govern commercial tenancies (including retail and industrial tenancies) suffering financial distress as a result of the COVID-19 pandemic.
The Code establishes a set of good faith leasing principles to be applied by owners/operators/landlords/tenants in negotiating amendments to current leasing arrangements, with the overall objective of the Code being to proportionately share the cash flow impact between the landlord and tenant during the COVID-19 pandemic.
The Code requires landlords and tenants to work together and negotiate appropriate and proportionate temporary leasing arrangements with regard to the tenant’s revenue, expenses and profitability.
Does the Code affect me?
The Code applies to all tenants that meet the eligibility criteria of the Commonwealth Government’s JobKeeper Programme (i.e. the business has lost more than 30% of its revenue in comparison to a comparable period a year ago) and has an annual turnover of up to $50 million.
Despite outlining this eligibility criteria, the Code also states that during the COVID-19 pandemic period, the principles of the Code should “apply in spirit” to all leasing arrangements for affected businesses.
The Code outlines a number of principles that should be applied on a case-by-case basis, including the following:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic (or reasonable subsequent recovery period).
- Landlords must offer tenants reductions in rent, in the form of waivers or deferrals, based on the reduction in the tenant’s trade during the COVID-19 pandemic (or reasonable subsequent recovery period).
- In conjunction with paragraph 2 above, rental waivers must constitute no less than 50% of the total reduction in rent payable by the tenant.
- If rent is deferred, payment of the deferred rent must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater (unless otherwise agreed between the parties).
- No fees, interest or other charges may be applied with respect to rent waived and no fees, charges or punitive interest may be charged in relation to deferred rent.
- Landlords must not draw on a tenant’s security (i.e. bank guarantee, cash bond or personal guarantee) for the non-payment of rent during the COVID-19 pandemic (or reasonable subsequent recovery period).
- Landlords must freeze any rent increases until the pandemic is over (excluding retail tenancies where the rent is calculated pursuant to turnover rent).
- Tenants should be provided with the opportunity to extend leases for an equivalent period of the rent waiver and/or deferral period to provide tenants with additional time to trade on existing lease terms.
McLaughlins Lawyers remains committed to assisting your business during the COVID-19 pandemic and we continue to monitor the application and implementation of the Code carefully.
If you are a commercial landlord or tenant that has been affected by the COVID-19 pandemic, please contact our office on (07) 5591 5099 and speak to one of our commercial lawyers today.
Author: Alex Hamlyn
Directors: Ian Kennedy and Sophie Pearson
Date: 14 April 2020