The COVID-19 pandemic has led to a significant reduction in turnover for many businesses around Australia. In some instances businesses have closed altogether. Commercial tenants are finding themselves unable to pay rent.  Landlords relying on a tenant to pay rent so that they themselves can meet mortgage repayments or to provide an income stream, are also finding themselves exposed to this sudden and unexpected financial dilemma.

On 7 April 2020, Prime Minister Scott Morrison announced that a mandatory commercial tenancies code, the Commercial Tenancies Code (Code), would  be legislated and overseen by each of the States and Territories and will apply to retail, commercial and industrial leases.  The Code will apply to tenants with a turnover of $50m or less who experience a 30% reduction in turnover and qualify for the JobKeeper program (SME Tenants).  It is anticipated that the Code will apply for as long as the JobKeeper program operates.  

While the Code is effective from 3 April 2020, there will be uncertainty for landlords and tenants alike until the Code is legislated.  Until then, landlords and tenants should assume that any legislation passed will have retrospective effect from 3 April 2020 and landlords tempted to evict tenants before the Code is legislated should tread carefully.

The Code expects that landlords will share a tenant's financial suffering during the COVID-19 pandemic.  To achieve a fair result the Code will facilitate rent reductions proportionate to a tenant's reduction in turnover and will include a mix of waivers and deferrals of rent during the COVID-19 pandemic, plus the reasonable recovery period that will follow.  Waivers must be at least half of the rent reduction, while deferrals will be offered to allow rent to be repaid over time, in some cases after the term of the lease.  In addition, in most instances there will be a freeze on rent review increases.

The Code will mean that tenants are protected from having their lease terminated for non-payment of rent.  However, a tenant loses protection under the Code if the tenant fails to otherwise comply with the main terms of their lease, which could mean their lease may still be terminated for reasons other than non-payment of rent. Security bonds and bank guarantees will be quarantined from the hands of landlords for non-payment of rent. 

The essence of the Code will require parties to act in good faith to manage rent relief during the COVID-19 pandemic.  There will be consequences for those who refuse to cooperate with one another.  However, for those who genuinely cannot reach agreement, there will be a dedicated dispute resolution body to mediate disputes arising from the Code.  The mediation will be binding.

Whether you are a landlord or a tenant, if you are faced with having to negotiate rent relief, you must consider:

1. the provision of sufficient and accurate information, such as financial information, and evidence of eligibility for the JobKeeper program;

2. that rental waivers must be no less than 50% of rental relief (although a tenant can waive this requirement);

3. that arrangements will be proportionate: for example, where the tenant's turnover is reduced by 60% the tenant will be entitled to claim rent relief of 60%;

4. that a landlord cannot recoup any rent waived over the term of the lease;

5. that a landlord cannot charge interest, fees or charges on rent waived or deferred;

6. that a landlord must not claim on a tenant’s security (bank guarantee, security deposit or personal guarantee) for non-payment of rent; and

7. the term of the lease and date of expiry deferrals must be spread over the remaining  lease term or at least 2 years, whichever is greater.

The Code makes it clear that each lease will be dealt with on a case-by-case basis.  Therefore it will be imperative that landlords and tenants review and consider their lease and their own financial situations.

Whether you are a landlord or a tenant, if you need advice in relation to negotiating rent relief under the Code for commercial, retail or industrial leases, please contact us.

The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.

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