THE IMPACT ON COMMERCIAL LANDLORDS AND TENANTS

On 7 April 2020, the National Cabinet adopted the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During Covid-19 (“Code”) to assist landlords and tenants when navigating the unprecedented impact of Covid-19.

The Code encourages landlords and tenants to:

  • negotiate in good faith;
  • act in an open, honest and transparent manner;
  • provide sufficient and accurate information to each other;
  • assist each other in their dealings with other organisations, such as banks, government authorities, utility providers etc;
  • proportionally share the financial risk and cash-flow impact during the Covid-19 pandemic period; and
  • enter into lease negotiations on a case-by-case basis taking into consideration the circumstances and factors of both the landlord and tenant so as to ensure the parties can recover and emerge from this crisis.

On 24 April 2020, the Code was legislated with the introduction of the Retail and Other Commercial Leases (Covid-19) Regulation 2020 (“Regulation”), providing landlords and tenants across New South Wales with the clarity they required.

What are the key takeaways of the Regulation?

The Regulation:

  • requires landlords and tenants renegotiate the rent and other terms of commercial leases in good faith and having regard to the leasing principles set out in the Code, before any legal enforcement action of the terms of those commercial leases can be commenced; and
  • prohibits and regulates the exercise of certain rights of landlords relating to the enforcement of certain commercial leases during the Covid-19 pandemic period.

How long will the Regulation apply to commercial tenancy arrangements?

The Code will apply for 6 months from 24 April 2020 after which it will be repealed on 24 October 2020 (“Prescribed Period”).

Which tenants are impacted?

The Code applies to all tenants who are eligible for the Commonwealth Government’s JobKeeper programme and have recorded an annual turnover of less than $50 million for the year ended 30 June 2019 (“Impacted Tenant”).

What are the key takeaways for commercial landlords and Impacted Tenants?

If an Impacted Tenant is a party to a commercial lease and requests that the terms of the lease are renegotiated, the parties must, in good faith, renegotiate the terms of the lease with regard to the leasing principles set out in the Code and the economic impacts of the Covid-19 pandemic.

The Code provides a number of leasing principles as follows:

  • (Termination) Landlords must not terminate a lease due to non-payment of rent during the Prescribed Period.
  • (Tenant Obligations) Tenants are to remain committed to the terms of their lease.
  • (Rent Relief) Landlords must offer tenants proportionate reductions in rent in the form of waivers and deferrals, based on the downturn in business of the tenant as a result of the impact of Covid-19. Landlords and tenants can also agree to other variations to the lease such as pausing and/or hibernating the lease.
  • (Rent Waiver) Waivers of rent are to constitute at least 50% of the total reduction in rent payable during the Prescribed Period, unless the tenant waives the requirement for a 50% minimum waiver by agreement. If an tenant request a waiver in excess of the minimum amount, regard is to be had to the landlord’s financial capacity. However, any amount of reduction provided by a waiver cannot be recouped by the landlord over the term of the lease.
  • (Rent Deferral) Deferrals of rent are to be spread over the balance of the lease term or for a period of no less than 24 months (whichever is the greater) unless otherwise agreed by the parties.
  • (Passing on Relief) 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 share with the tenant, in a proportional manner, any benefit received as a result of deferral of loan repayments.
  • (Recovery) Landlords should, where appropriate, waive recovery of any other expense or outgoing payable by a tenant during the period the tenant is not able to trade.
  • (Period of Repayment) Any repayment which arises as a result of negotiating the lease arrangements should be repaid over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the pandemic ending or the existing lease expiring.
  • (No fees, interest or charges) No fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferrals.
  • (Protection of Security Interests) Landlords must not draw on a tenant’s security under the lease for non-payment of rent during the Prescribed Period.
  • (Extending Lease) Tenants should be given the opportunity to extend their leases for an equivalent period of any rent waiver and/or deferral period.
  • (Rent Increases) Landlords must freeze any rent increases (except for retail leases based on turnover rent) for the duration of the Prescribed Period, unless the landlord and tenant agree otherwise.
  • (Penalties) Landlords must not impose any penalties if tenants reduce operating hours or cease to trade due to the pandemic.

What if the Impacted Tenant has breached the commercial lease?

If an Impacted Tenant has breached a commercial lease, the landlord must not take any action under the provisions of the lease, seek orders or issue proceedings in a court or tribunal against a tenant, for any of the following:

  • eviction of the lessee from premises or land;
  • exercising a right of re-entry to premises or land;
  • recovery of the premises or land;
  • distraint of goods;
  • forfeiture;
  • damages;
  • requiring a payment of interest on, or a fee or charge related to, unpaid rent otherwise payable by a lessee;
  • recovery of the whole or part of a security bond under the commercial lease, performance of obligations by the lessee or any other person pursuant to a guarantee under the commercial lease;
  • possession;
  • termination of the commercial lease;
  • any other remedy otherwise available to a lessor against a lessee at common law or under the law of this State, unless the landlord has complied with the Regulation and the leasing principles set out in the Code.

Notwithstanding the above, a landlord will have no grounds to:

  • terminate a commercial lease; or
  • take any of the above action against the tenant, for any act or omission by the tenant that is required under a law of the Commonwealth or the State in response to the Covid-19 pandemic.

However, a landlord will have grounds to terminate a commercial lease or take any of the above action against the tenant if the landlord’s reasons do not related to the economic impacts of the Covid-19 pandemic.

Dispute Resolution and Court Proceedings between Landlords and Tenants

A landlord must not:

  • seek to recover possession of premises or land under the commercial lease; or
  • terminate a commercial lease; or
  • exercise or enforce any other right of the landlord under the commercial lease,

unless and until:

  • the parties have engaged in mediation to resolve the dispute;
  • the Small Business Commissioner has certified in writing that the parties have failed to resolve the dispute through mediation; and
  • the Small Business Commissioner has given reasons for the failure.

If the matter is referred to Court, in considering whether to make a decision or order relating to:

  • the recovery of possession of premises or land from a lessee; or
  • the termination of a commercial lease by a landlord; or
  • the exercise or enforcement of another right of a landlord of premises or land, the Court will have regard to the leasing principles set out in the Code.

How we can assist?

As the Regulation and Code will have considerable impact on landlords and tenants, we implore our clients (whether they are a landlord or tenant) to contact our office so that we can:

  • provide accurate advice with regard to their circumstances in light of the Covid-19 pandemic;
  • facilitate any lease negotiations and ensure they comply with the Regulation and Code;
  • prepare a Covid-19 Deed of Relief to document any agreed lease negotiations;
  • provide certainty as to the various obligations imposed on landlords and tenants for the remainder of the lease term and potentially after expiry of the lease term;
  • enforce any breach of a commercial lease or non-compliance with the Regulation and Code; or
  • represent you in any lease dispute whether in mediation or court proceedings.

Author: Tim Arvanitis

Contact our Commercial team today at enquiries@antunes.com.au or phone us today on 02 9964 0499 to arrange a video conference.

The articles on this website comprise legal general information and not legal advice. The general information presented here must not be relied upon without legal advice being sought. In the event that you wish to obtain legal advice on the contents of this general information you may do so by contacting our office or your existing solicitor.