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COVID-19: GUIDANCE FOR LANDLORDS AND TENANTS

COVID-19: GUIDANCE FOR LANDLORDS AND TENANTS

  • April 15, 2020
  • April Peterson
  • Comments Off on COVID-19: GUIDANCE FOR LANDLORDS AND TENANTS

Below are our further tailored recommendations in relation to the mandatory Code of Conduct for commercial tenancies.

RECOMMENDATIONS FOR LANDLORDS

  • A landlord should familiarise themselves with the Code, focusing on the Leasing Principles as they look to support tenants during the COVID-19 pandemic
  • The Code expressly cautions against a landlord seeking to redistribute the risk of default from themselves to a tenant.  The principles set out in the Code strongly discourage opportunistic behaviour of any kind, in particular by landlords.  We recommend landlords remain reasonable and avoid any behavior that may be construed as opportunistic.
  • A tenant may not necessarily have up-to-date financial statements.  A landlord should carefully review any financial statements provided by their tenant indicating a loss of revenue and pay particular attention to a tenant’s online sales.
  • There may be a need for a mechanism for an independent auditor or other independent process to provide verification of annual turnover and/or reduction in that turnover.

Reducing Services

  • Where a landlord considers reducing services in accordance with Leasing Principle 8, careful consideration needs to be given to any flow on impact of performance criteria provisions in the lease and the effect the reduction in services may have on other tenants where multiple tenants occupy the same building.

Lease Security

  • Prior to negotiating any rental relief arrangements, a landlord should review the existing security provisions for their lease and the lease security itself.  Particular attention should be paid to the following:
    • any expiry date for the lease security;
    • any date by which the lease security must be returned or released; and
    • what obligations of the tenant, other than payment of rent, the lease security is securing (such as make good obligations).
  • A landlord should ensure that the lease security does not expire and that there is no requirement to release or return the lease security prior to all lease obligations having been met by the tenant, including repayment of deferred rent.  Care should be taken where the period for repaying deferred rent will continue after a lease was originally due to expire.
  • Consideration should be taken as to whether an increase in the lease security (including provision of additional security such as a personal guarantee) is reasonable.  The Code does not prevent a landlord requesting increased or additional security, though this should not be done so where opportunistic and not a reasonable reflection of the risks being assumed by the landlord.

Mortgagee Consent

  • Where the landlord has a mortgage concerning the premises, the landlord should review the terms of that mortgage to determine if they need to obtain consent prior to agreeing to any amendment or variation to the lease. 

Guarantor

  • Where another person or entity has guaranteed the obligations of the tenant under the lease that person should also agree and be a party to any variation to the lease or relief arrangements.

Rent Reviews

  • Any rent relief arrangements need to consider pending rent reviews and how these may be impacted.
  • If a Market Rent Review is due to occur in the near term, then as part of any rent relief arrangement the Landlord should consider whether:
    • the current terms of the market review permit a decrease in the rent or whether there is a valid ‘rachet’ clause;
    • the review date should be extended or waived given the current economic climate; and
    • a different form of review would be more appropriate.

Insurance

  • If there is any loss of rent insurance policy applicable to the lease, the terms of this policy should be reviewed to determine if any coverage is afforded to the landlord and whether any specific type of rent relief arrangement may prejudice this coverage.  Whilst early indications are that COVID-19 issues are unlikely to be covered by insurance, we recommend a landlord contact its insurance provider to discuss such matters.

RECOMMENDATIONS FOR TENANTS

  • A tenant should avoid any suggestion that they intend to stop paying rent.  This is important to avoid the possibility of anticipatory breach or its actions being considered a repudiation of the lease.
  • A tenant must be sure to provide correct information that relates to turnover and the effect of COVID-19 so as to comply with the overarching principles of the Code.
  • Consideration should be given to a tenant’s losses and that it may continue to accrue and change over time.  Timing of the request for rental waiver or deferral or any formula for calculating a rental waiver or deferral may be very important to ensure that the agreement reached with the landlord is sustainable.
  • A tenant should be mindful of their holistic financial situation during negotiations around rent relief arrangements.  If a tenant fails to meet their obligations under the rent relief arrangement or any other lease obligations the protections of the Code could be waived.
  • A landlord may request a tenant to provide additional security or guarantees.  Consideration should be given as to whether such a request is reasonable and not opportunistic. 
  • A tenant should determine whether any policy of business interruption insurance may apply in the current circumstances and if any form of rent relief arrangement may prejudice this coverage.  Early indications are that COVID-19 issues are unlikely to be covered by insurance.  We recommend a tenant contact its insurance provider to discuss such matters.
  • Where a tenant has foreign ownership, an extension of the lease term or substantial variation of the lease may attract the operation of the Foreign Acquisitions and Takeovers Act 1975 and its recent reduction of the thresholds applicable under the Act to zero.  In limited circumstances this may require the tenant to make application for a no objection letter, approval or exemption under the Act.
  • A tenant should ensure that they continue to maintain all insurances required under its lease during any period of premises closure.

If you are a tenant and think you may be entitled to rent relief under the Code, we are happy to assist with drafting or reviewing letters to your landlord on these issues, together with formal arrangements to vary the lease in respect of the rent relief arrangements.  For tenants who do not fall within the Code, landlords and tenants may still make commercial arrangements in relation to an appropriate level of rent abatement (if any) under a lease.

WE CAN HELP

We are available to assist landlords and tenants to work through these complex requirements and negotiate outcomes to protect their businesses through the COVID-19 pandemic and best position them for recovery.

All information is current as of 4:00pm on 14 April 2020, based on publicly available information.

Disclaimer: This update does not intend to provide legal advice and should not be relied upon as such. If you require independent legal advice or would like to discuss any of the issues raised that may be applicable to your situation, please do not hesitate to contact our team.

Liability limited by a scheme approved under Professional Standards Legislation.

Prepared by Darryl Kipping and Dora van der Westhuyzen

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