COVID-19 and commercial tenancies - future directions?

What you need to know

• The Government has announced that a mandatory code of conduct will be introduced to guide dealings with commercial and retail tenancies. 
• This code of conduct will be developed and subsequently legislated by State and Territory Governments to apply to tenancies, but only those tenants that are small or medium sized enterprises and that are eligible for the Commonwealth Government's JobKeeper assistance (see our note here for further details) .
• However, this does not extend to the big end of town, who are left to negotiate with each other but without any indication as to what support will be extended by Government.

What you need to do

• The proposed code of conduct will be discussed at the next meeting of the National Cabinet on Tuesday 7 April. Watch this space as we'll provide an update and commentary once the outcome of that meeting is known.
• Accordingly, until the code of conduct has issued and becomes legislation, landlords and tenants should continue to talk and consider what interim measures can be put in place to ensure that they best support each other through these uncertain times. 

While the Government seeks to provide certainty and job security, the National Cabinet continues to grapple with complex issues surrounding commercial tenancies and seeking to balance the competing interests of tenants, landlords, lenders and investors. Scott Morrison gave a press conference last Friday which provided an indication of the direction that Government is likely to take. 

However, this does not extend to the big end of town, who are left to negotiate with each other but without any indication as to what support will be extended by Government. The Treasurer's announcement a week ago to reduce the notification threshold for FIRB applications (which has a wide ranging impact on leases to be granted to those considered to be "foreign persons") further exacerbates issues for such landlords and tenants. In these uncertain times where non-compliance with lease terms have significant implications for landlords and tenants and their stakeholders (including their banks, their investors and their employees), greater guidance is required. 

We will examine what the latest update means for those landlords and tenants to whom it applies.

A mandatory code of conduct and who does this apply to?

The Government has announced that a mandatory code of conduct will be introduced to guide dealings with 'commercial tenancies' (including retail tenancies). This code of conduct will be developed and subsequently legislated by State and Territory Governments to apply to tenancies, but only those tenancies that are small or medium sized enterprises and that are eligible for the Commonwealth Government's JobKeeper assistance (see our note here for further details). It is hoped that the States and Territories will take a consistent approach, however the existing inconsistencies in retail tenancy legislation will make that difficult to achieve in all respects.

As the code will only apply to tenancies that have an annual turnover of less than $50 million and have had at least a 30% loss of revenue as a result of the COVID-19 crisis the Prime Minister's original advice stands – they should speak to their landlords to "Work it out. They both need each other." This leaves larger tenants (including the large retailers) and landlords left without guidance and without any government-backed comfort that if relief is provided to either one of them, that there is some obligation to share or pass this on. 

What are the principles underlying the code of conduct if it applies to you?

The principles underlying the code of conduct are likely to be:

(a) Where it can, rent should continue to be paid;

(b) Where there is financial distress as a result of COVID-19, tenants and landlords should negotiate a mutually agreed outcome;

(c) There will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between the parties;

(d) There will be a prohibition on termination of leases for non-payment of rent (lockouts and eviction);

(e) There will be a freeze on rent increases (except for turnover leases);

(f) There will be a prohibition on penalties for tenants who stop trading or reduce opening hours;

(g) There will be a prohibition on landlords passing land tax to tenants (if not already legislated);

(h) There will be a prohibition on landlords charging interest on unpaid rent;

(i) There will be a prohibition on landlords from making a claim to a bank guarantee or security deposit for non-payment of rent; and

(j) Any legislative barriers or administrative hurdles to lease extensions will be removed (so that a tenant and landlord could agree a rent waiver in return for a lease extension).

These principles are still being discussed and National Cabinet is hoping to finalise them early this week.

Will the code of conduct be prescriptive? 

The code of conduct will not be prescriptive as Government wants to maintain its original position that landlords and tenants should be talking to each other to resolve issues having regard to their particular circumstances. Rather, the code is intended to guide negotiations. Parties are expected to negotiate in good faith and have regard to a proportionality principle. Scott Morrison gave an example of this – if a landlord agrees to a three or six month rental waiver because a tenant has had to close its doors, the tenant may agree to extend the lease for three or six months after its expiry date or agree to a different level of rent over the whole term. 

Landlords may be provided with incentives for signing up to the code. States and Territories are considering providing the equivalent of at least a three month land tax waiver and three month land tax deferral on application to eligible landlords. If a landlord receives such a benefit, it will be required to pass on that benefit to its tenants. 

Where landlords and tenants have signed up to the code of conduct, the ability for landlords to terminate leases will not apply. Rather, tenants will have protection around evictions, claims and penalty interest under the code of conduct. However, one question remains – what will signing up to the code mean, given the Government has already said it will be mandatory?

What about lenders?

While the code of conduct will not apply to lenders, the Government is calling on them to provide support where they can. The big four banks have offered loan repayment holidays for business customers with loans of up to $10 million for up to six months. Again, these measures are not likely to apply to institutional landlords who will need to find ways to support their tenants, or to large landlord who will need to find ways to comply with their lease obligations, while continuing to comply with obligations to financiers and investors. 

What comes next? 

Landlords and tenants are keen for the code to be settled and legislated by States and Territories as soon as possible to provide some certainty. Accordingly, until the code of conduct has issued and becomes legislation, landlords and tenants should continue to talk and consider what interim measures can be put in place to ensure that they best support each other through these uncertain times. 

The proposed code of conduct will be discussed at the next meeting of the National Cabinet on Tuesday 7 April. Watch this space as we'll provide an update and commentary once the outcome of that meeting is known.

If you would like to discuss the implications of these updates in relation to your commercial tenancy, please do not hesitate to contact us.

If you would like to read more of our legal updates and stay up to date on developments relating to COVID-19 you can click here.