Publications

The CCLCC – The COVID-19 Commercial Leasing Code of Conduct

Published on April 8, 2020 by Selwyn BlackSelwyn Black

On 7 April 2020 the PM on behalf of the National Cabinet announced what will shortly become this legally enforceable Code of Conduct (Code).

1. The Code is strongly tied to the national JobKeeper program, so that it only applies to commercial industrial and retail tenancies suffering financial stress or hardship as a result of the COVID-19 pandemic (as defined by their eligibility for the JobKeeper program), with an annual (group) turnover of up to $50m (eligible tenants).
2. The Code will apply during the period of the JobKeeper program is operational – initially 6 months.
3. The JobKeeper program focuses on revenue reductions of more than 30% of revenue over a corresponding period as a result of the COVID-19 pandemic, so that tenants would need to meet that threshold, and other JobKeeper eligibility requirements will apply. Note the corresponding period does not have to be a whole year – it could for example be this April against last April
4. Landlords and tenants are encouraged to agree tailored, bespoke and appropriate temporary arrangements for each applicable tenancy taking into account their particular circumstances on a case by case basis.
5. Overarching and Leasing principles have been announced (see below) and it is stated that they should be applied as soon as practicable on a case by case basis – and it is expected that these will be the basis for negotiating and enacting appropriate temporary arrangements.
6. The Code is intended to restrain landlord enforcement, including drawing on bonds, pending an agreement. If there is no agreement there will be a binding mediation process. We expect that this will draw on the existing state tenancy mediation processes. In our experience those state mediations are reasonably efficient and effective.
7. The negotiation process will sometimes require an exchange of information, including from the tenant, turnover figures including for a comparable figures from the prior year, generated from an accounting system, and from the landlord details of benefits they have received from their banker, or in statutory concessions (e.g. land tax).

So what to do in practice?

8. Landlords and tenants should start the information gathering and exchange process, including for a tenant to show that it is eligible for the JobKeeper program, and for the landlord to provide details of the loan, land tax etc and other concessions it has or may obtain.
9. The parties should consider the long term value of the tenancy in the location – is it a travel agent or a chemist? Is a residential conversion now a possibility? Will the same size premises be required is some staff work form offsite in the long term?
10. Legal advice should be obtained to ensure that what is done, does not prejudice the future legal rights and obligations of either party beyond key variations agreed.
11. Landlords may choose to make this more efficient based upon a legal template approach guided by the principles, with key details to be inserted, including the tenant turnover reduction, and whether that is to be determined on a one-off basis or on an ongoing basis, the amount waived versus deferred, the period of deferment and of any lease extension, etc. In some states it may be appropriate to register at least some variation terms- eg extensions.
12. Because the Code refers to a reduction in cash flow and taking into account for example land tax concessions, it seems that it intends that the abatement/deferment mechanisms (on a proportional basis), will apply to outgoings payments as well as other rental charges.
13. The principles and a non – binding example from Code is set out below. Finally we observe that there is every opportunity to customise arrangements, by mutual agreement. Some lateral thinking and mediation skills will be valuable.

Overarching Principles

• 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.

Leasing Principles

In negotiating and enacting appropriate temporary arrangements under this Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis:

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.

APPENDIX I EXAMPLES OF THE APPLICATION OF THE PRINCIPLE OF PROPORTIONALITY

The following scenarios are examples only, noting the circumstance of each landlord, SME tenant and lease are different, and are subject to negotiation and agreement in good faith. Examples of practical variations reflecting the application of the principle of proportionality may include, but are not limited to:

• Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis o ie. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.

At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen. o Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties

• So if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.

Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.

The parties would be free to make an alternative commercial arrangements to this formula if that is their wish.