One of the most common issues confronting both businesses and property investors during this Pandemic is how commercial tenancies should be dealt with.
We have prepared a brief overview of the Code of Conduct for Commercial Leases, which was one of the measures announced by National Cabinet in the last few weeks.
This overview is not intended to be an exhaustive examination of this area – that is impossible at this stage as we await the release of specific regulation implementing the Code’s measures.
The Code was announced by National Cabinet on 7 April 2020 as part of a range of measures.
For those who aren’t aware, the National Cabinet is made up of the Prime Minister and each of the State and Territory leaders – in and of itself it doesn’t actually have any legal authority, so the decisions it reaches need to be implemented at the relevant government level (a bit like international treaties need to be ratified in each country to be of effect).
As property and leasing matters are state based laws, this means that it is up to each state to regulate the Code as part of its own state program.
In Queensland, that process has started with the passing of the Covid-19 Emergency Response Act (CERA).
CERA included a couple of mechanisms for implementing the Code through regulations under the Act, and under the Retail Shop Leases Act. These Regulations can include things such as the prohibition of recovering possession, or terminating leases.
CERA also introduce the role of “Small Business Commissioner” who will be tasked with a number of functions, including assisting in the resolution of small business leasing disputes, and administering mediation processes in relation to the same.
At this stage, none of the regulations has actually been released, so we will look further at the Code to see what these Regulations are likely to include.
The Code relates to commercial tenancies – retail, commercial, office, industrial. There are separate rules relating to residential tenancies which we will address in a future video.
The Code is intended to be mandatory for what are called “SME Tenants”.
SME Tenants are tenants who are eligible for the JobKeeper programme (ie. where the business has faced a 30% fall in their turnover) with a turnover of up to 50 million dollars.
The turnover limit will apply at the individual franchisee level for franchises and at the group level for corporate groups.
While the Code will not be mandatory for leases to which it doesn’t apply, the Code states that it should ‘nevertheless apply in spirit’ to all leasing arrangements for affected businesses having regard to the size and financial structure of the business’. It remains to be seen how many landlords will take notice of this exhortation.
The stated objective of the Code is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interest of tenants and landlords.
The Code includes a number of overarching principles intended to apply.
These principles include:
- Tenants and landlords negotiating in good faith;
- Tenants and landlords acting in an open, honest and transparent manner, with each providing sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the Code
- Leases being dealt with on a case by case basis. There won’t be a one size fits all industry wide approach.
As well as the overarching principles, the Code sets out a number of leasing principles that should be applied as soon as practicable on a case by case basis. These principles include:
- Non-termination of leases for non-payment of rent during the pandemic period and a reasonable recovery period – it is important to note that this suggests that landlords are not prohibited from terminating leases for other breaches.
- Tenants must remain committed to the terms of their lease (subject to amendments negotiated under the code) and a failure to do so would forfeit the protections provided under the Code;
- Landlords must offer proportionate reductions in rent in the form of waivers (which is where the rent reduced does not ever have to be repaid) or deferrals (where the rent reduced is deferred to a later time) based on the reduction of the tenant’s trade during the pandemic period and subsequent reasonable recovery period.
- Waivers must be no less than 50% of the total reduction in rent, and should be a greater proportion where the failure to do so would compromise a tenant’s ability to fulfil their ongoing obligations under the lease agreement;
- Landlords must not charge fees, interest or other charges for waived rent.
- Deferrals must be amortised over the balance of the lease term or for 24 months, whichever is greater, unless otherwise agreed
- Landlords must not charge punitive interest on deferrals.
- If a landlord receives a reduction in outgoings (such as land tax, rates, insurance) those reductions must be passed on to the tenant.
- Landlords should share the benefit of loan payment deferrals provided by their lenders;
- During the pandemic period and a reasonable recovery period, Landlords must not draw on any security provided by the Tenant, and there can not be any rent increases (other than increases based on any turnover rent).
I think one of the most important issues to be addressed by regulation will be how the Pandemic Period and the Reasonable Recovery Period is determined.
From midnight tonight (15 May) we are starting stage 1 of Queensland’s Roadmap to easing restrictions, with Stage 2 proposed to start on 12 June and Stage 3 on 10 July.
Obviously many business will be under significant restriction to their ordinary trade until at least Stage 3, and even during that period.
There have been some fairly pessimistic views on economic recovery, so it will remain to be seen whether the ‘Reasonable Recovery’ period will be linked to some kind of economic recovery or something else.
The Code requires the States to implement commercial leasing dispute resolution processes to apply where landlords and tenants cannot agree on leasing arrangements.
The Retail Shop Leases Act in Queensland has some framework for dispute resolution for retail leases, although with the establishment of the Small Business Commissioner, it remains to be seen how this process will work for commercial leases generally – particularly those that are not caught under the Retail Shop Leases Act.
While we are waiting for further clarity about the implementation of the Code in Queensland, we are strongly encouraging our landlord and tenant clients to start negotiating under the Code – to put in place practical and workable solutions during this time.
In our view, it is important that any agreements reached are appropriately documented, and also able to be reviewed in the event conditions change.
The Code has the potential to require complex commercial agreements to be put in place, and if you are a tenant or landlord you should obtain appropriate legal advice about your rights and obligations.
Our property team remains available for discussion and consultation – please contact us by telephone on 5606 7332 or at our website www.ballantynelaw.com where you can book a video conference with on of our commercial lawyers.
Thanks for listening to our overview today.