The Prime Minister held a further press conference on 7 April 2020 to, amongst other things, reveal that the National Cabinet had agreed to the terms of a mandatory Code of Conduct to govern the relationship between landlords and small-medium enterprise tenants who may be in financial distress due to the COVID-19 pandemic.
The concept of the mandatory Code being introduced was not new, having been flagged by the Prime Minister in his press conference on 3 April 2020. The release of the Code has put an end to weeks of speculation and uncertainty for landlords and tenants alike who have been waiting for further guidance before negotiating rent relief for tenants in financial distress.
While stressing that each leasing arrangement is unique, the Code sets out certain principles which must be applied in negotiations between landlords and tenants. The Code is mandatory where the tenant is eligible for the Government’s JobKeeper program (requiring turnover of less than $50 million and a fall in revenue of at least 30%) and will remain in effect while the JobKeeper program is operational. The Code also expresses a desire that other landlords and tenants who are not bound by the Code may also wish to negotiate their arrangements in line with the principles set out in the Code.
It is our strong recommendation that any waivers, deferrals of rent or other payments, extensions of the term of the lease or any other agreed variations are documented in a deed to ensure that they are binding on all parties. Where a lease is registered, it may be necessary for any variations to be recorded on the title to the property by registration of a Form 13 Amendment with the Titles Office.
One question that we have been asked by many landlords is whether they are entitled to take action against tenants for non-payment of rent prior to the commencement of the COVID-19 crisis. That question has been answered in part by the first leasing principle set out in the Code, which states that landlords must not terminate leases for non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period). It would appear then that landlords are not precluded from exercising their rights in relation to non-payment of rent occurring before COVID-19. It would also now seem clear that while landlords cannot call on bank guarantees, cash bonds or personal guarantees provided by tenants in respect of non-payment of rent during the COVID-19 pandemic period and subsequent recovery period, that moratorium does not extend to non-payment of rent that occurred prior to COVID-19.
An aspect of the Code that had not been flagged before today, is that landlords of affected tenants must offer those tenants proportionate reductions in rent in the form of waivers and deferrals of up to 100% of the amount that would ordinarily be payable by the tenant, based on the reduction in the tenant’s trade, during the COVID-19 pandemic period and a subsequent reasonable recovery period.
Waivers must constitute at least 50% of the total reduction in rent and should constitute an even greater proportion where failure to allow that waiver would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease. Granting a waiver will mean that the landlord will never recover that rent from the tenant.
Deferrals of the balance of the rent relief must be spread over the remaining lease term or for a period of at least 24 months, whichever is greater. For example, if the balance lease term is 3 years, the deferral will be spread over 3 years, however if the balance lease term is 6 months, the deferral will be spread over the minimum period of 24 months.
Tenants should also be provided with an opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period to allow the tenant to trade for sufficient time to meet their obligations under the lease. Landlords should check the expiry dates of any bank guarantees that they hold. Where an expiry date is noted on a bank guarantee it is normally within 3-6 months after the expiry date of the lease. Where a lease term is extended, the bank guarantee may expire prior to the new expiry date so landlords should consider requiring the tenant to provide an amended bank guarantee with an expiry date that is 3-6 months after the last date of the extended term.
In terms of outgoings, where a landlord has secured a reduction in statutory charges (such as rates or land tax) or insurance, those reductions should be passed onto the tenant. Landlords should also seek to waive recovery of other outgoings during the period that the tenant is not able to trade. The use of the phrase “seek to” is not as strong as the requirement that 50% of the rent must be waived so the position in relation to outgoings is not as clear as that for rent. Land tax is charged by the various State governments and while the Federal Government media statements have referred to waivers and deferral of land tax by State governments, no announcements have been made by the State government in that regard.
Landlords cannot charge interest or fees on unpaid or deferred rent. This places landlords in an unenviable position with their financiers as most financiers, while agreeing to suspend repayments or temporarily converting loans to interest only, are insisting on interest being charged at usual rates, which if not paid is then added to the loan amount and capitalised. In his press conference, the Prime Minister exhorted the banks to come to the party to assist landlords and tenants in distress however the Government has not made any suggestion that legislation would be introduced to force banks to share the losses that will no doubt be suffered by landlords under the Code. It would seem that in terms of interest at least, the cost will not be shared in a fair and equitable manner and will need to be absorbed by landlords.
Where a landlord and tenant cannot reach agreement on the rent relief that will be offered to the tenant during COVID-19, the matter can be decided for them by binding mediation, which will be administered by the respective States.
It is now up to the States to enshrine the principles set out in the Code in legislation. The timing for that is not known at this stage, nor is it known whether the legislation will be on identical terms to the Code released today.
If you require specific advice in relation to your leasing matter or how the Code can be applied to your circumstances, please contact our Commercial + Property Team for assistance.