The federal government announced a ‘mandatory code of conduct’ of small and medium enterprise commercial leasing principles during Covid-19 (the “Code”), a copy of which is available here. The Code applies to all retail, office and industrial commercial leases where the lessee is an ‘eligible business’ – that is, the business has a turnover of less than $50 million per year and is eligible for the federal JobKeeper program.
This week the Western Australian parliament received the Commercial Tenancies (COVID-19 Response) Bill 2020 (the “Bill”). The Bill effectively mirrors the proposed legislation introduced in other Australian jurisdictions which are all modelled on the national Code.
There are a raft of measures introduced, though perhaps most significantly is that the Bill puts a moratorium on evictions of small businesses for non-payment of rent. This is an extraordinary measure considering that both foreign and domestic banks have merely been ‘urged’ to follow the Code’s principals by the federal government. While one might imagine it unlikely, there is no direction from the government that enforcement action cannot be taken by a mortgagor against a landlord who stops repaying an outstanding loan due to non-payment of rent by their tenant. Further, as regards payment of rent, landlords must offer tenants a rent reduction or waiver of at least 50% and up to as much as 100% relative to the reduction in the tenant’s income due to Covid-19 for the duration of the JobKeeper program. Tenants may waive the offer, however, are under no obligation to do so. The balance of the reduction not waived can be deferred and amortised over a period of the balance of the lease or 24 months, whichever is the greater.
How then does this work? The government provided a neat example in the Code for a commercial tenant that has suffered a 60% loss in turnover:
- The commercial tenant has suffered a 60% loss during the COVID crisis and is therefore guaranteed a 60% cash flow relief;
- at a minimum, half of the rent reduction is provided as rent free/rent waiver; and
- up to half could be through a deferral of rent;
- the second half is to be recouped over at least 24 months in a manner that is negotiated by the parties.
To then confirm, if the commercial tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. Naturally, if the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral. The portion of rent waiver can be greater than 50% of the rent reduction if the tenant can prove their ability to pay will be compromised. If that principal is sought to be triggered by a tenant, a landlord’s ability to manage that becomes relevant. Therefore, landlord’s with unencumbered properties might be more disadvantaged by the Code than those with heavily leveraged properties.
Importantly, consideration is to be given to a Landlord’s financial ability to provide relief (and further relief) and the Code is a good faith instructional with the parties being free to make alternative commercial arrangements, or no arrangements at all. However, when the Bill passes parliament and becomes legislation, the requirements to negotiate will become mandatory.
The Bill (and the Code) takes measures beyond the payment of rent, for example, making it such that any fixed-term leases that end during COVID-19 automatically become periodic tenancies. This means that a tenant is not obliged to sign up to a lease for an extended length of time where to make future projections about their business may be difficult, or impossible. As regards a landlord, while they will not have locked in a tenant, at least they keep some arrangement in place in the short term.
The Bill and the Code remain flexible and, most importantly, the intention is to encourage tenant and landlord to work together in good faith to ensure a mutually beneficial relationship pushing forward in a difficult commercial time for everyone. Tenants and landlords are encouraged to discuss and negotiate.
Further principals of the Code for commercial landlords and tenants to consider include:
- landlords cannot draw on tenant’s security for non-payment of rent;
- landlords must pass on to tenants any benefits they have received from their banks;
- tenants cannot be required to pay outgoings if they are not occupying the property;
- a freeze on rental increases;
- no interest can be charged on waived rent and no fees or punitive interest on deferred rent (implying commercial interest rates can be charged on deferred rent);
- no penalties can be charged to a tenant for the tenant reducing their trading hours.
If a landlord and tenant cannot negotiate an agreed amended lease arrangement then the matter is to be submitted to the State Administrative Tribunal for binding mediation.
Some interesting issues that arise from this is that tenants that want a rent waiver and/or deferment will have to provide turnover figures to landlords. This may impinge on post COVID-19 rental negotiations for a tenant. How often should landlords review the tenant’s income? Also, how will you document this ‘new norm’ particularly to ensure it ends at an appropriate time and does not permanently vary the lease?
Lynn and Brown Lawyers will continue to monitor the situation regarding commercial leases, the Bill and the Code. Once the Bill has passed through both houses of parliament we will provide an online webinar to discuss some of the obligations and rights of tenants and landlords more specifically.
In the meantime, if you are a tenant or a landlord that needs to plan and prepare for the future then please contact us. Our website now has the direct contact details for ours lawyers. We are operating digitally and can facilitate electronic informal conferences to initiate discussions and reach agreements between commercial tenant and landlord about how you can work together to ensure each party comes out of the Covid-19 crisis in as strong a position as possible.
About the authors:
Ben is a Perth Lawyer and Associate at Lynn & Brown Lawyers. He was admitted into the Supreme Court of Western Australia in July 2013, and specialises in both commercial law and dispute resolution matters. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.