Tues 28/04/20 – COVID-19 Code of Conduct for Commercial Leases

The Prime Minister has announced the eagerly anticipated National Code of Conduct for rent relief during the COVID-19 Pandemic (Click here for documentation) and has urged cooperation between Landlords and Tenants to get through the crisis.

The State Government announcement 15th April (Click here for documentation) covers off land tax relief measures.

The code is intended as a broad-brush conceptual draft to be adopted and woven into the fabric of each of the States’ existing tenancy legislation, which is yet to occur in Victoria.

In our continuing discussions with clients over the past number of weeks, and recognising that there are many unanswered queries, we are briefly summarizing the current situation via a series of commonly asked questions together with answers:

 

What information has been released by Commonwealth and State Government?

(Click here for documentation)

1. Victoria State Government – Media Release 15th April 2020 – Note: this provides for Landlords who are affected to claim a 25% discount on the current year’s land tax and a deferment of the balance due until 31st March 2021

2. National Cabinet – Mandatory Code of Conduct

 

Who does it apply to and who is affected?

Tenants and Landlords with annual revenue under $50 million and who qualify for the Commonwealth JobKeeper program. National Cabinet has stated that the spirit of the Code should apply to all leasing arrangements for affected businesses with a fair regard to size and financial structure.

 

Why is it necessary?

To enable Landlords and Tenants to agree on rent relief measures during the crisis.

 

When does it start and end?

There is no specific commencement date, but it is intended to cover the period of the pandemic and a reasonable subsequent recovery period, yet to be defined.

 

How is the rent relief level to be approached?

The parties are encouraged to arrive at a suitable arrangement, or for the reduction to be proportionate to the tenant’s turnover and trading results. For retail Tenants and Franchisees, the turnover is to be applied at the group, rather than the individual tenant level.

At least half of the reduction must be a clear waiver; the balance to be deferred over 24 months from the end of the pandemic or the remaining lease term, whichever is greater.

Example:

Monthly rent – $10,000 + outgoings + GST  

Decrease in Tenant’s turnover (and/or trading results):  60%

1. Rent drops to $4,000 per month during the applicable period.

2. At least $3,000 per month is waived and as much as $3,000 may be deferred.

3. The rent reverts as per lease when the Commonwealth declares the crisis to be over, at which time and unless otherwise legislated, the tenant also commences repayment of the deferred rental.

4. The Tenant may also seek to extend the lease for an equivalent period of rent relief granted.

 

Does the Code affect outgoings?

Outgoings are to be reduced in line with the rental and waived if the tenant is not able to trade.

 

What happens to rent reviews and lease expirations?

There is a rent freeze during the pandemic period irrespective of anything provided for within the lease. There is no specific provision, yet, for lease expiries.

 

What happens if tenants must stop trading or choose to close?

 The tenant could be required to stop trading, reduce their trading hours or choose to do so entirely. There is to be no penalty in such cases.

 

What information can the Landlord and Tenants require?

 The Tenant may be required to provide comparative revenue, expense, and income together with what ‘self-help’ measures it has undertaken.  Likewise, the Landlord must disclose any assistance, such as interest or rate reductions or deferrals.  An example of our draft Tenant information questionnaire is attached.

 

Can a Landlord access the Bond or Guarantee?

There is no access to Bank Guarantees, Bonds or Personal Guarantees pursuant to the current guideline for the six months to 1 October; This is subject to review.

 

What happens if the Landlord or Tenant doesn’t cooperate?

If no agreement is reached, where leasing arrangements are directly impacted by the pandemic, either party may refer the dispute via an appropriate resolution process, such as the Small Business Commissioner or VCAT.

 

Practical Considerations:

Landlords recognize that in the short term a very high percentage of tenancies would be forced out of business without significant relief; and that it is in both parties’ interests to avoid this situation via interim arrangements. The mid-range and longer-term impact could be significant, but it is too early to gauge the severity or specifics with any degree of certainty.

 

What is our experience during the past 2-3 weeks since the Pandemic has become a reality?

The majority of tenants and owners have been cooperative and many, if not most, have come to interim arrangements prior to the Code being introduced.  Some tenants have been more aggressive or avoided communication.  We anticipate that a standard will emerge over the coming weeks and months, particularly when the Code provisions are incorporated into State Government tenancy regulations.  The emerging information will be covered in our continuing communications.

Should you wish to discuss the above further, please do not hesitate to contact any of the Gross Waddell Team.