COVID-19 – Rent relief and the National Cabinet’s mandatory Code of Conduct

Landlord and tenant rent relief negotiations should temporarily cease to enable parties to take into account the ramifications of the binding Code of Conduct (“Code”).

 Tenants - Does the Code apply to you?

 The Code applies to all commercial tenancies where the tenant has met the eligibility criteria for the Commonwealth Government’s JobKeeper programme.

 To be eligible for JobKeeper, the tenant, amongst other criteria, must: 

(a)          have a turnover of less than $50 million; and

(b)          have a 30% or greater loss in revenue.

Tenants - If the Code applies to you, what if you have already negotiated and agreed on a rent relief package with your landlord?

 Tenants will be able to renegotiate an existing rent relief package with their landlords to be consistent with the Code where:

• the tenant is eligible for JobKeeper; and

• those negotiated rent reductions/variations provide for less rent relief or impose repayment obligations that are inconsistent with the Code

 Landlords with eligible tenants will need to agree to bespoke and appropriate temporary arrangements for each eligible tenant, taking into account their particular circumstances (financial/practical). 

 NOTE – Landlords and tenants are free to make alternative commercial arrangements/rent relief by mutual agreement.  

Non-eligible tenants

Some tenants will not be eligible for JobKeeper.  In that case, the landlord is not bound by the Code and both landlord and tenant will remain bound by the terms of their lease.

 HOWEVER 

 “”…the principles of this Code should nevertheless apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.””

 As such, if landlords are considering negotiating with their tenants, regardless of their JobKeeper eligibility, then the Code (inclusive of its Overarching Principles and Leasing Principles) provides some guidance and framework – but landlords are not bound to the Code and can offer alternative rent relief. 

A summary of the Code’s Overarching Principles (OAP) to the Code’s Leasing Principles

• Landlords and tenants are to negotiate in good faith and in open and honest manner, to negotiate appropriate temporary leasing arrangements and relief, and to collaborate for mutually satisfactory outcomes that are proportionate and based on the pandemic’s impact on both landlord and tenant. 

• Landlords and tenants are both to provide sufficient and accurate evidence (accounting/financial) as the basis for the proportionate arrangements to rent relief.

The Code’s Leasing Principles

We summarise the Leasing Principles to apply in landlord/tenant negotiations. 

1. No termination - Landlords must not terminate due to non-rent payment during the pandemic.

2. Lease compliance - Tenants must remain committed to their lease and tenant breaches will not be protected under Code.

3. Rent relief – Landlords must offer proportionate relief based on the tenant’s revenue reduction – relief is to be by way of waiver and deferral. 

4.          Waiver – no less than 50% must be waived. Regard must be had to the Landlord’s financial ability to provide additional waivers. Tenants can waive less than 50% if it compromises the landlord. 

5.          Deferral – no less than 50% must be deferred and amortised over the lease term for no less than 2 years or otherwise agreed.

6.          Statutory Charges – Relief on statutory charges to be proportionate to rent relief. 

7.           Landlords Finance – Proportionate landlord financier relief should be passed to the tenant.

8.          Outgoings – Recovery of outgoings from tenants waived – landlords to reduce services.

9.          Repayments - No repayment of deferred rent until pandemic end or lease expiry, whichever is earlier. 

10.         No penalties – Landlords must not charge fees, interest on deferred rent or repayments. 

11.          Security Deposits/Bank Guarantees – Landlords must not draw on tenant’s security bonds or bank guarantees.

12.         Lease Extension – Tenants can request to extend their lease terms to cover the pandemic period. 

13.        Rent Reviews – Rent review increases are frozen during the pandemic and any recovery period. 

14.        Prohibitions - No landlord penalties on reduced hours or cessation of trade. 

Binding Mediation

Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the pandemic), the matter should be referred and subjected (by either party) to leasing dispute resolution processes for binding mediation by the Small Business Commissioner. 

Next Steps:

We are recommending to landlords and tenants that a deed of variation to the lease be entered into to reflect any agreed new arrangements.

• Landlords:

  • Call on evidence that their tenant is eligible for JobKeeper.  

  • Call on sufficient and accurate accounting and finance information.

  • Call on the tenant’s proposed relief and any further variations to the lease.

  • Check your lease expiry dates to assist with relief decisions.

  • If your premises is encumbered, check if your financier will offer you relief first. 

  • Prepare any evidence of your own insurance or statutory relief. 

  • Enter commercial negotiations. 

  • Prepare the deed of variation to the lease. 

• Tenants:

  • Consider the Code’s application – are you JobKeeper eligible?

  • Call on the landlord for evidence of any financial relief passed on by landlord financiers/insurers/statutory charges. 

  • Consult your accountant and prepare your financials – your percentage of revenue reduction is integral to your relief. 

  • Propose your relief based on your percentage revenue reduction.

  • Propose any further variations to the lease

  • Enter commercial negotiations. 

  • Execute the deed of variation to the lease. 

Whitehead Legal is ready to commence next steps with landlord and tenant clients, or any new clients who require urgent commercial assistance. 

We recommend that we be given the opportunity to review any new leasing arrangements before you reach a final agreement. 

Please do not hesitate to call to discuss.

Whitehead Legal approach to COVID-19

We are working remotely, and we are agile. We are contactable via normal means – mobile phone/email, along with Skype and Facetime.

The pandemic has placed unprecedented pressure on our dental, medical, veterinary and allied health clients.  We are cognisant of the social and family pressures our clients are facing, let alone the increasing commercial pressures.

For our existing clients, or new clients, reach out if you need urgent commercial assistance or general legal advice – a quick reassuring chat is, of course, gratis and if you need further engagement from us, we can work out expenses between now and when your practice returns to normal.

Below are examples of some special challenges and considerations for you and your practice and we invite all health practitioners to reach out if you are in need.

Practice owners:

Your Premises Lease:

• Commercial negotiations on your premises  lease  with your landlord.

  • A damaged/destroyed premises is usually the only lease provision for a rent furlough or decrease.

  • Non-payment  of rent may breach your lease so ensure you have commenced negotiations with the landlord.

  • We had known that Government directives to landlord/tenant emergency rights and tenant relief were imminent.  Relief formally arrived on April 8, 2020 with the release of the National Cabinet Mandatory Code of Conduct (“the Code”).  You should cease any relief negotiations which you may have commenced to take into account the ramifications of this binding Code – refer our separate letter also attached for your information.

  • Whilst closing  your premises or heavily reducing opening hours had previously been a breach of the lease, a landlord can no longer impose penalties for doing so. Current social distancing recommendations and infection control processes must of course apply.   

• Dealing with landlord breaches (eg fixing persistent leaks, air-conditioning replacement etc) and negotiating set-offs for any landlord obligations that have historically been overlooked.

Your Practice

·       Negotiations  with your  suppliers.

·       What to do with your  employees?

·       Urgent  practice sales  and expedited due diligence and negotiations through to a quick settlement.

o   Where necessary, we are seeing  deferred purchaser payment schemes.

·       A proposed capital injection from in house  associate practitioners becoming 50/50 equity owners  can be even further expedited.

·       Swift  shareholder/partnership/associateship agreements  to provide comfort going forward for multiple owner practices. These agreements are where owners look to for guidance in crisis; without an ongoing agreement, your risk level increases, particularly if your practice is facing uncertainty and even litigation. 

·       General advice  for multiple practice owners.

Contractors/service providers/potential practice purchasers/employees:

·       Negotiations  with your employer/principals, particularly over  unpaid treatments/commissions.

·       Opportunities  for quick outright  practice acquisitions,  along with expedited due diligence and negotiation.

·       Expedited equity associateship/partnership purchases  for existing associate practitioners looking to purchase a percentage interest in their employer’s existing practice.

Premises owners:

• Negotiations  with your tenants on rent/outgoings and general lease breaches.  We had known that Government directives to landlord/tenant emergency rights and tenant relief were imminent.  Relief formally arrived on April 8, 2020 with the release of the National Cabinet Mandatory Code of Conduct (“the Code”).  You should cease any relief negotiations which you may have commenced to take into account the ramifications of this binding Code – refer our separate letter also attached for your information.

• Ensuring your  landlord obligations  are up to date, particularly if you have common or shared services with multiple tenancies – are your common area infection controls satisfactory?

• Ensuring you have no historical or ongoing landlord premises or services  breaches. These are high risk areas which unnerved tenants may use to negotiate rent relief.  

We are also experiencing a marked upswing in  wills  and  powers of attorney  queries and, generally, clients wanting to put their affairs in order and discuss  succession planning.  We advise all clients to ensure their wills and powers of attorney are up to date especially when they have had a significant commercial matter finalised or other significant change in their personal circumstances or assets.

Whitehead Legal can work with you remotely and our hours are a flexible 5am – 9pm.  We are ready to support your needs and we wish you and your practice and your families well. 

Warranties

Seller warranties in a practice sale agreement are tantamount to express guarantees or promises to a buyer that specific facts or conditions are true or will happen.  What are you willing to warrant as the seller of your practice and what are buyers wanting you to warrant?  Buyers seek warranty protection in a wide range of matters, including intellectual property rights, financial matters, title to and adequacy and state of the assets, quality and performance of plant and equipment, employment issues and whether the buyer is subject to any litigation.  However, warranties should not be used as a substitute for the buyer’s own due diligence.

Warranties are key provisions of a practice sale agreement.  A practice owner must read carefully  and confirm  they are comfortable with what they are warranting.  When acting for buyers, we see examples of warranties being proffered in a first agreement draft, only to be later withdrawn by the seller – usually with no explanation.  This can raise queries by a buyer as to the seller’s agenda.  So, sellers, read and understand your warranties and ensure from the first draft agreement that you are comfortable and understand what you are warranting.  Warranties relating to the financials may need to be properly verified by your accountant.  A breach of a warranty will provide a buyer with a right to claim damages in compensation for the breach provided the buyer can prove loss or damage in that the effect of the breach was to reduce the value of the asset acquired.

You will recall our past blog on the importance of town planning permits.  Sellers should be willing to warrant that they hold all statutory certifications, licences, registrations, approvals, permits, consents and authorisations necessary for the carrying on of the practice at the practice premises and that the seller’s use of the premises complies with any planning permit or applicable law.  If the practice to be purchased/sold is a three (3) practitioner clinic with all correct permit documentation, it is commercially reasonable for a seller to warrant usage of the practice for the three (3) practitioners practising at any one time.  If a practice has five (5) practitioners practising at any one time, but only a three (3) practitioner permit, and the seller is warranting that the usage of the practice complies with the town planning permit, then the seller is already opening up to issues with a buyer.  As an aside, do not stress if you have an established practice (15+ years) without a town planning permit or the practice premises are within a commercial zoning which permits the use;  there are alternative avenues for premises usage and “as of right” compliance.   

Sellers should not take a buyer’s request for further and better warranties as a personal affront.  Most warranty requests by buyers are commercially reasonable and are industry standard – and are usually asking the seller to stand behind the practice, particularly when the consideration is high.  If the seller is a company, expect the seller’s director to personally and additionally provide the warranties.  This too is industry standard.

It is important that seller warranties are drafted so that they are clear and certain and most sellers will seek to limit their liability as to time and quantum.  Our Whitehead Legal practice sale agreement provides a fair and reasonable set of seller warranties which a buyer’s lawyer will find commercial and acceptable.

Watch our Blogs for commentary on  Start-Ups

Employee Entitlements

Employees are an integral part of any practice especially non-professional staff who are the first face patients see entering the practice or speak to whilst booking appointments.  Long serving employees are usually regarded as enhancing a practice and its goodwill.  Purchasers will likely seek to engage the employees as transferring employees from the settlement date, as compared to not engaging them – non-transferring employees.  Purchasers can select the employees they require as transferring employees.

 Part of any due diligence for purchasers and vendors is to ensure the employee entitlements (“EE”) are fully disclosed.  Expect to disclose figures for  accrued long service leave  (7+ years), contingent long service leave  (4 - 7 years),  annual leave  and  personal/carer’s/sick leave.  Figures for practices with a number of long servers who have not taken all their accrued sick leave over the years, let alone their long service leave and/or annual leave, are likely to be $high.  This can cause concern during due diligence especially when a party has not been properly advised or fully appreciated the magnitude of the EE liability figure.  So, how is this efficiently handled - consider the following example:

Dr. P is purchasing Dr. V’s practice for $750,000.00.  There are 3 long serving employees and 1 employee who has been at the practice for 4.5 years.  Dr. P is to take the 3 long servers as transferring employees.  The 4.5 year employee is a non-transferring employee who will cease service at settlement and all owed entitlements will be paid out directly by Dr. V.  The 3 long serving employees have taken most of their annual leave and long service leave, but hardly any sick leave which has accrued to $40,000.00. 

• The sale contract states that Dr. P is responsible to pay the sick leave when it becomes due. But, sick leave may never become due to a certain transferring employee. Dr. P and Dr. V should reach a fair agreement and the appropriate allowance should be made. The sick leave quantum was accrued on Dr. V’s watch, so Dr. V should agree to allowing and adjusting a percentage of the sick leave quantum in favour of Dr. P as a deduction from the purchase price. As this is an unknown factor, the protocol is that Dr. V and Dr. P will share the commercial risk for example; at 50/50, $20,000 will be deducted from the purchase price, at 25/75 $10,000 will be deducted from the purchase price. Dr. P then pays the employee the necessary sick leave as and when that employee takes the leave. This is called sharing the commercial risk because at the time of settlement no one is to know how much sick leave, if any, a particular employee will need to take.

 Whilst the adjustment of accrued long service leave is uncomplicated, the fair adjustment of contingent long service leave also has its idiosyncrasies – call Whitehead Legal to discuss.

Vendors:

• What are the employee dates of commencement of service?

• What are their days/hours worked per week?

• What is their rate of remuneration?

• Detail their long service leave, annual leave and sick leave figures – accept that there will need to be allowances at settlement in the purchaser’s favour

• Always keep your employee records updated and expect to provide the figures early to the purchaser and to warrant the figures are true and accurate

Purchasers:

• Be mindful as to how you treat your employees, it can be a stressful time for them too

• Ensure your lawyer asks the proper due diligence EE questions

• Make sure you and your accountant are comfortable with the EE figures and the adjusted allowances in your favour

• If EE figures are not readily forthcoming, query why?

The due diligence process surrounding EEs needs to be thorough to ensure purchasers have a clear picture of their transferring employees EE status and a purchaser is not burdened with unwarranted expense in the future.  Our Whitehead Legal Due Diligence Compliance Checks should not only discover any issues, but also assist and manage solutions to any issues.

Watch our Blogs for commentary on  Warranties