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COVID-19: MANDATORY CODE OF CONDUCT FOR COMMERCIAL TENANCIES

COVID-19: MANDATORY CODE OF CONDUCT FOR COMMERCIAL TENANCIES

  • April 15, 2020
  • April Peterson
  • Comments Off on COVID-19: MANDATORY CODE OF CONDUCT FOR COMMERCIAL TENANCIES

WHAT DOES IT MEAN FOR YOU?

On Tuesday 7 April 2020, the Commonwealth Government introduced a mandatory Code of Conduct for commercial tenancies (Code) to address the impact of COVID-19 on commercial tenants.  The Code sets out principles to govern commercial tenancies, including retail, office, and industrial tenancies, to be implemented by all states and territories.  The Code significantly changes the rights and obligations of landlords and tenants under those leases.  A full copy of the Code can be accessed here.

WHEN WILL THE CODE COME INTO EFFECT?

The Code will be given effect on a date to be determined by each jurisdiction after 3 April 2020.  It will apply for the period during which the Commonwealth’s JobKeeper program remains operational, this being an initial period of six months though subject to change, and continue for a “reasonable subsequent recovery period”. What will constitute a reasonable recovery period is yet to be defined and may differ from tenant to tenant. 

The West Australian Government has indicated that it will convene this week to consider the legislative amendments required to implement and regulate the Code. 

WHO DOES IT APPLY TO?

The Code applies to all commercial tenancies (including retail, office and industrial tenancies) where:

  • the tenant has an annual turnover of up to $50 million;and
  • the tenant is eligible for the Commonwealth Government’s JobKeeper program (which requires the tenant to demonstrate a drop in their revenue as a result of the COVID-19 pandemic of at least 30%).

The $50 million annual turnover threshold will apply to franchises at the franchisee level, and to retail corporate groups at the group level, rather than at the individual retail outlet level.

The Code does not apply to residential tenancies, however the Western Australian Government has indicated that relief legislation for residential tenancies will be passed along side the Code.

WHAT IF I AM NOT ELIGIBLE?

For tenants that are not eligible for the JobKeeper Program or have an annual turnover of more than $50 million, the Code will not apply.  Despite this, the Code stipulates that the principles should nevertheless “apply in spirit” to all leasing arrangements for affected businesses.

KEY PRINCIPLES OF THE CODE

The Code sets out 14 good faith Leasing Principles to guide discussions between commercial landlords and tenants, where the trade of a qualifying tenant is significantly affected by COVID-19.   The key principles of the Code, which applies in the case of an eligible tenant are as follows:

Positive obligations

  • Lease obligations – A tenant must maintain compliance with the terms under their lease failing which the tenant will forego the protections provided by the Code.
  • Rent reductions – A Landlord must offer a tenant rental reduction in the form of waivers and deferrals that reflect the reduction in the tenant’s turnover during COVID-19.  Rental waivers must constitute no less than 50% of the total rent reduction. Rental deferrals must be amortised over a minimum 24-month period.
  • Benefits to be passed on to tenants– A Landlord must pass on any reduction it receives in statutory charges (eg land tax, council rates) in the appropriate proportion applicable to the lease.
Restrictions

  • No termination – A Landlord must not terminate leases for non-payment of rent.
  • No penalties – A Landlord must not charge fees or interest on rent payments being deferred or waived.
  • No draw on security – A Landlord must not draw or call upon on a tenant’s security (cash bond, bank guarantee or personal guarantee).
  • Term extensions – A Landlord should offer a tenant the right to extend their lease for a period equivalent to the agreed rent deferral period.
  • Rent increase freeze – A Landlord must freeze rent increases (other than turnover rent) for the duration of COVID-19 and a reasonable recovery period.

Our analysis and commentary on each of the principles can be found here.

WHAT ARE THE OVERARCHING PRINCIPLES?

The Code provides eleven Overarching Principles (such as to negotiate in good faith) to guide landlords and tenants during negotiations concerning tenancy arrangements affected by COVID-19 to ensure a mutually acceptable outcome is achieved. A copy of the Overarching Principles can be found here.

WHAT IF NO AGREEMENT IS REACHED?

The Code provides that where landlords and tenants are unable to agree on leasing arrangements, either party may refer the matter for binding mediation.  In Western Australia such mediation is to be conducted by the Small Business Development Corporation.  A landlord or tenant must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.

WHAT ABOUT COMPLEX LEASING ARRANGEMENTS?

To date the Government has not distinguished between simple and complex leasing arrangements.  Leasing arrangements involving head leases, subleases, concurrent leases or other license arrangements have not been accounted for.  We expect that the wide meaning of ‘landlord’ and ‘tenant’ will be applied.  We strongly encourage early negotiations between all parties in complex leasing arrangements, to ensure that specific circumstances of all parties are considered and addressed collectively.

ADDITIONAL CONSIDERATIONS

  • Where the term for a retail tenancy is extended commensurately with the time of any forced shutdown or rent abatement, consideration needs to be given as to whether a new disclosure statement may be required.
  • If the agreement intends to amend an existing registered lease, the amendment needs to be registered with Landgate. 
  • Parties should ensure there are no inadvertent waiver of rights and or the creation of express or implied representations or warranties during their negotiations.  The impacts of the changes on the whole lease needs to be carefully considered.

WE’VE REACHED AN AGREEMENT, WHAT NOW?

We recommend formally documenting any agreements, rental relief arrangements or new terms agreed between a landlord and tenant in a deed.  We can assist with documenting any rental relief arrangements by way of short form deed of variation to the lease and in accordance with the requirements of the Code.  

We also encourage all negotiations and information exchanges between landlords and tenants take place on a “without prejudice and confidential” basis.

We highly recommend any agreement reached be documented subject to any statutory changes.

GENERAL RECOMMENDATIONS

Both landlords and tenants should:

  • start the information gathering and exchange process as soon as possible. For example, a tenant may need to gather information to demonstrate its eligibility for the JobKeeper program, and the landlord may need to provide details of its mortgage, land tax and other concessions it has or may be eligible for;
  • be aware of their rights and obligations both under their existing lease arrangements and how those are affected by the Code and state legislation when it is passed.  We recommend reviewing your current lease prior to commencing any negotiations;
  • implement the Overarching Principles during negotiations to ensure a mutually acceptable outcome is achieved;
  • seek independent legal advice in relation to the application of the Code to their individual circumstances prior to entering into any agreements; and
  • consider income and GST tax implications on a deferral of rent as compared to waiver of rent.

Further tailored recommendations for landlords and tenants can be found here.

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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