The Federal Government has released a mandatory Code of Conduct to govern the relationship between Landlords and small-medium enterprise Tenants in financial distress due to the COVID-19 pandemic.
The Code, when legislated by the states, will effectively replace the terms of the lease in relation to items such as the amount of rent, the length of the lease and outgoings the tenant is required to pay and the rights of a landlord if a tenant defaults under the lease.
In this article we will provide advice to Landlords and in Part 2 we will provide advice specific to Tenants.
SME Commercial Leasing Principals During Covid-19 – Landlords and the Code of Conduct
Given the release of the Code of Conduct, and its clear intention to mitigate the impact of the COVID-19 pandemic on Tenants, Landlords are effectively “on notice” for any dealings they have with Tenants of 7 April 2020.
Locate the lease document
Locate any written lease documents and ensure that:
- the lease term has not expired; and
- the document is fully signed by you and the Tenant.
Seek legal advice immediately if you cannot locate a copy of your lease, or you are unsure whether it is valid.
Contact your Tenants
- Determine whether the Code of Conduct applies to your Tenant. A tenant will qualify for the JobKeeper program if:
- The tenant has turnover of less than $1 billon and their turnover has decreased (or will likely decrease) by at least 30%; or
- The tenant has turnover of more than $1 billon and their turnover has decreased (or will likely decrease) by at least 50%;The Code will remain in effect whilst the JobKeeper program is operational.
- Ensure that the Tenant is otherwise abiding by the terms of the lease.If not, you should seek legal advice as to whether the Tenant has forfeited the protections of the Code of Conduct, which would allow you to enforce default provisions (including termination) in the lease against the Tenant.
- In your discussions with the Tenant, try to determine whether the Tenant’s business has been so compromised by the COVID-19 pandemic that they may be considering liquidation, administration or bankruptcy; so that you can take any steps that you need to protect your position early.
How to calculate a rent reduction
In calculating any reduction in rent:
- The Code of Conduct requires Landlords of affected Tenants to offer those Tenants proportionate reductions in rent in the form of waivers and deferrals of up to 100% of the amount that would ordinarily be payable by the Tenant.
- The reductions will be calculated based on the Tenant’s trade during the COVID-19 pandemic period and a reasonable recovery period following this.
- At least 50% of the total reduction in rent must be a waiver.Landlord’s need to be aware that granting a waiver to a Tenant means that the Landlord will never be able to recover that rent form the Tenant.
- Deferral of any further proportion of the rent must be spread over the remaining lease term or for a period of at least 24 months, whichever is greater.A deferral of rent will allow the Landlord to recover rent from the Tenant following the deferral period.
Are you negotiating an extension of the lease term?
- Review the term of the existing lease. This will assist in determining what, if any, reduction in rent payable you are required to provide Tenants:
- In particular, you should consider the term of the lease and its expiry date, and how much of the lease term remains until expiry?
- The Code of Conduct requires, unless you agree otherwise with the Tenant:
- If the balance of the lease term is longer than 24 months, then the rent deferral must be spread over that whole balance lease term.
- If the balance of the lease term is shorter than 24 moths, then the rent deferral must be spread over the minimum period of 24 months.
- Landlords should consider providing Tenants with an opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period to allow the Tenant to trade for sufficient time to meet their obligations under the lease, including payment of any deferred rental payments.
If a lease term must be extended, it is important that any extension is documented by the parties. For a lease registered on a property’s title, the extension of any lease term will need to be in the correct form so that it can also be registered on title.
We recommend you obtain legal advice before agreeing to any extension of the lease term, as there may be other legal implications to such an agreement.
Does the lease provide for any upcoming rental increase?
If there is an upcoming rental increase in your lease, you cannot increase the rent for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.
Has the tenant provided a cash bond, bank guarantee or personal guarantee in the lease?
Has your Tenant provided you with a cash bond, bank guarantee or personal guarantee from an individual under the lease?
You cannot draw on that cash bond, bank guarantee or to enforce the personal guarantee during the rent waiver and deferral period.
If you have a bank guarantee from the Tenant
If you are negotiating the extension of an existing lease, ensure that any bank guarantee provided to you by the Tenant will not expire during the newly extended lease term.
If the bank guarantee will expire, consider whether the Tenant should provide an amended bank guarantee with an expiry date that is 3-6 months after the last date of the extended term.
Under the Code of Conduct, beware that Landlords cannot:
- Terminate a lease due to a Tenant’s non-payment of rent whilst the Code of Conduct remains in effect (that is, whilst the JobKeeper program is operational).
- Charge interest or fees on unpaid or deferred rent, even if the lease terms allow you to do so.
Outgoings payable by the Tenant under the lease
Where a Landlord has secured a reduction in statutory charges (such as local council rates or land tax) or insurance, those reductions should be passed onto the Tenant.
The Code of Conduct also requires Landlords to seek to waive recovery of other outgoings during the period that the Tenant is not able to trade.
Contact your own financier
Ensure your financier is aware that the waiver or deferral of your Tenant’s rent payments may impact on your ability to meet repayments on any loans owing.
At this stage, financiers are not bound by any similar Federal Government Code of Conduct, so interest will continue to accrue on borrowings even if a landlord’s loan repayments have been suspended or converted to interest only.
Do you own any plant and equipment or other items in the lease premises?
If you have any personal property on the lease premises (i.e. equipment used by the Tenant but owned by the Landlord), ensure that your interest in those items is registered on the Personal Property Securities Register.
If your Tenant goes into administration during this period, it is important that you have protected your interest in any items in the lease premises which are not fixtures. Registering your security interest in the Personal Property Securities Register provides you with that protection.
It is important that even through these uncertain times that both Landlords and Tenants look to the future and consider what the best outcome will look like at the end of the crisis. For most, the most important thing to the Landlord will be to have a continuing Tenant who can easily restart their business and for the Tenant to have a place to recommence their business from.
The constantly evolving situation also means each day there are new and different incentives from both the government and banks to help Tenants and Landlords through this time. It is essential that everyone keeps up-to-date with these announcements so that they know exactly what assistance they can access.
We will provide further guidance on the Code of Conduct specific to Tenants shortly.