Blogs

Commercial Research – BETWEEN THE LINES BRIEF

Mandatory “Code of Conduct” for Commercial Leasing during COVID-19

8 April 2020

The commercial property community has been eagerly awaiting the Government’s announcement regarding the future for commercial tenants and landlords suffering financial stress or hardship as a result of the COVID-19 Pandemic. The need for a consistent approach has been called for after the suggestion that tenants and landlords should negotiate on a case by case basis – causing uncertainty for all parties. The proposed mandatory “Code of Conduct” will share in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords. The previous announcement of a six month moratorium on eviction for non-payment of rent remains and additional good faith principles include a tenant’s security may not be drawn down on over this period. It is further emphasised that the terms and conditions of the current lease remains in place and needs to be met by the tenant.

  • The “Code of Conduct” will apply to all tenancies that are suffering financial stress as defined by their eligibility for the Commonwealth Government’s JobKeeper programme. A $50 million annual turnover threshold will be applied in respect of both landlords and tenants limiting the programme to SMEs.
  • Landlords must offer tenants proportion at reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, 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 upon consideration of reduction in trade, remembering where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such

additional waivers. Eg. 30% loss of turnover should result in 15% waiver of rent.

  • The remaining 50% of the reduced turnover amount will constitute the deferral amount with the payment of rental deferrals by the tenant to be amortised over the balance of the lease term and for a period of not less than 24 months, in the case of shorter lease terms. Eg. 30% loss of turnover should result in 15% waiver and 15% deferral of rent.
  • Regarding outgoings, 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 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.