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:
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.
