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Commercial rent reductions [Free Guide]


What you need to know - in a nutshell


As a result of the coronavirus, the government introduced a Mandatory Code of Conduct for landlords and tenants to negotiate a reduction and deferral of commercial and retail rents and to halt evictions.


To implement the Code, the States and Territories are enacting laws.


Key Features:

- Commercial tenants can not be evicted for a period of 6 months for unpaid rent.

- Rent can not be increased during the pandemic.

- Rent can be paid later (eg at the end of the lease) or reduced.

- Landlords can expect to receive rate and land tax reductions under separate legislation. These reductions must be passed on to the tenant on a proportionate basis.

- The parties must mediate any dispute before suing each other in court.


When does it start? It is starts as soon as the States and Territories pass the legislation. Victoria and NSW have done so already.

The Code will last as long as the JobKeeper program is running.


How does it work?

The Code directs the landlord and tenant to negotiate amendments to the lease together in good faith. To guide the parties, the government sets out a set of ground rules on how the negotiation is to take place, called "Overarching Principles". They are set out below.


The government also sets of a series of "Leasing Principles" for how the negotiation and implementation is to work. The parties are to apply the principles 'as soon as practicable' (which means as soon as it is practical to do it) and on a case by case basis. They are set out below too.


If the parties can't agree, either party can send the matter to mediation for a legally binding outcome. It can be sent to Small Business Commissioners/Champions/Ombudsmen (or women!) as applicable.


Who is eligible?


A business is eligible if they: a- Had turnover of under $50 million per year;

b- Experienced more than a 30% reduction in turn over as a result of coronavirus; and

c- Are eligible for JobKeeper.


The business needs to meet all three of the above criteria to be eligible.


The types of leases the act covers includes:

a- Retail leases

b- Residential tenancy agreements

c- Farm leases

d- Occupancy agreements

e- Site agreements

f- Leases under any other legislation relating to the leasing of premises or land for residential or commercial purposes.


Overarching Principles and Leasing Principles


For an introduction to the principles, please see "how does it work" above. We have copied the principles directly from the Code.


The Overarching Principles are:

-Landlords and tenants share a common interest in working together, to ensure business continuity, and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during a reasonable recovery period.

- Landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes. - Landlords and tenants will negotiate in good faith. - Landlords and tenants will act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with this Code. - Any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period. - The Parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of this Code.

- All premises are different, as are their commercial arrangements; it is therefore not possible to form a collective industry position. All parties recognise the intended application, legal constraints and spirit of the Competition and Consumer Act 2010. - The Parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under this Code.

- All leases must be dealt with on a case-by-case basis, considering factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic; whether the tenant’s lease has expired or is soon to expire; and whether the tenant is in administration or receivership. - Leases have different structures, different periods of tenure, and different mechanisms for determining rent. Leases may already be in arrears. Leases may already have expired and be in “hold-over.” These factors should also be taken into account in formulating any temporary arrangements in line with this Code. - As the objective of this Code is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership, and the application of the Code modified accordingly.


The Leasing Principles are:

1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period). 2. Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code. 3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period. 4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.

5. Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties. 6. 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. 7. A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner. 8. Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances. 9. If negotiated arrangements under this Code necessitate repayment, this should occur 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 COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period. 10. No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above. 11. Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period. 12. The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes. 13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant. 14. Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.


Happy to help

Legal Enablers is experienced in acting for tenants and landlords on retail leases and commercial leases.


Should you have any questions, please do not hesitate to contact Caroline Mense of our office on carolinem@legalenablers.com or (03) 8691 3218. Best wishes,

The Legal Enablers Team


We love helping. This article was created to add to the body of knowledge. It is intended to be information only and not legal advice. Please seek legal and accounting advice about your circumstances before taking action. For a lawyer- come see us! ;)


 
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