Property Update: COVID-19 and Commercial Tenancies

8 April 2020

Publications

The government provides more guidance with a code, but the detail will be left to Landlords and Tenants.

Legislation update (current as at 8 April 2020).

The National Cabinet has announced that a mandatory code for commercial tenancies will be introduced, guiding mandatory rent relief to tenants in line with the hibernation strategy. The aim is to see businesses through the COVID-19 pandemic period and provide a reasonable recovery period.

Despite the detail provided by the code, the Government recognises that leases have different structures which must be taken into account when agreeing temporary relief arrangements.

This code has been developed on a national level, however it will be legislated separately in each State and the Territories.

When will it apply?

The mandatory code will apply to all leases where:

  • the tenant has suffered financial stress or hardship as a direct result of the COVID-19 pandemic. SME tenants which are eligible for the JobKeeper program (which requires a 30% reduction in business) are automatically considered to be in financial distress; and
  • the turnover of the tenant’s business is $50 million or less (this is applied to franchises at the franchisee level, and in respect of retail corporate groups, at the group level rather than the individual retail outlet level).

Summary of the Code

The code is based on “good faith” leasing principles, and effectively:

  • landlords will not be able to terminate or draw down on security held under the lease (e.g. bank guarantees or security deposits during the COVID-19 pandemic period where the failure to pay rent is due to the COVID-19 crisis);
  • the tenant must continue to honour the terms of the lease;
  • the landlord must reduce the rent proportionate to the trading reduction in the tenant’s business;
  • the rent reduction offered may be provided through a combination of waivers and deferrals of rent;
  • landlords will be required to pass on any reduction in statutory charges, and should seek to share benefits of deferred loan repayments provided by banks, and outgoings should be waived or reduced where appropriate;
  • there will be a freeze on rent increases during the COVID-19 pandemic period (as defined by the Australian Government) and taking into account a reasonable recovery period;
  • tenants may elect to extend their lease term for a period equivalent to any rent waiver or deferral period, to allow them the ability to trade on existing lease terms after the COVID-19 pandemic period has passed; and
  • there will be a State based, binding mediation process underpinning this regime.

Rent Relief Structure

 The amount of rent relief to be provided by the landlord to each eligible tenant will be proportionate to the reduction in the tenant’s business.  The rent relief may be negotiated between the landlord and tenant, however:

  • at least 50% of the rent relief offered must be in the form of a rental waiver; and
  •  whilst deferrals may be amortised over the remainder of the lease term, they must be amortised over a minimum of 24 months. This means that if there is only 6 months left on the term, the tenant will have a further 18 months after expiry to continue to make payments.

The code provides some examples of proportionate solutions as a guide.  The Code can be accessed in full by clicking here.

Messages for Landlords and Tenants

The sentiment from the Government has been consistent in relation to commercial tenancies – that tenants and landlords should be negotiating rental relief to attempt to ensure that both parties are in a position to rebuild and continue operations after the effects of the COVID-19 pandemic start to lift.

There is also a clear message that despite the $50 million threshold, the principles of the code should nevertheless apply to all leasing arrangements for affected businesses having regard to the size and financial structure of those businesses.

Now that there is more clarity in relation to how the regulatory framework will look, these discussions may progress, and begin to be documented.

While the landlords must bear the cost of this rent reduction, the Government has expressed their expectation that any banks provide support to struggling landlords to ensure that lines of credit remain open, and landlords are able to continue to operate.

We expect more certainty as to State specific legislation to be available shortly.

Next steps

Should you have any queries in relation to the code or what it might mean for you, please contact a member of our national property team.