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Leasing during COVID-19 Part 2 – Tenants

By April 16, 2020Property Law
Leasing during COVID-19 Part 2 - Tenants

Advice to Tenants on the Commercial Tenancies Code of Conduct

Yesterday we issued an alert for Landlords in relation to the mandatory Code of Conduct to govern the relationship between Landlords and small-medium enterprise Tenants in financial distress due to the COVID-19 pandemic.

In this alert, we will provide advice to Tenants.  This will be a very difficult time for many Tenants whose business has been impacted by the social distancing requirements and travel restrictions.  It is hoped that the Code of Conduct, with the other government assistance packages, will allow Tenants’ to have a viable business at the end of the crisis.

Locate the lease document

Tenants should locate any written lease documents and ensure that:

  1. the lease term has not expired;
  2. the document is fully signed by you and the Landlord; and
  3. if the lease term is longer than 3 years, the lease is registered on the property’s title.

Seek legal advice immediately if you cannot locate a copy of your lease, or you are unsure whether it is valid.

Contact your Landlord early

Be in contact with your Landlord as soon as:

  1. you experience difficulties in paying any rent or other costs payable under the lease; or
  2. you shorten trading hours or cease trading altogether, particularly if your lease has mandatory minimum opening hours and/or days; or
  3. you become eligible for the Federal Government’s JobKeeker program (your turnover has decreased (or will likely decrease) by at least 30%);

to begin negotiating the waiver or deferral of rental payments.

Negotiating a rent reduction with your Landlord

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.

Waiver of Rent

  1. When negotiating the reduction in any rental payments with your Landlord, be aware that at least 50% of the total reduction must be a waiver of rental payments. This means you will not ever be required to pay the waived proportion of the rent.
  2. However, a Tenant can waive the requirement for a 50% minimum waiver by agreement. Any waiver should be documented and signed by both parties.
  3. We recommend you seek legal advice before you enter negotiations or sign any agreement with your Landlord. You should not give up the benefit of the waiver lightly.

Rent Deferral

Any rent deferred will be payable in the future. Unless you agree otherwise with the Landlord:

  1. if the balance of the lease term is less than 24 months, your deferred rent will be payable over the next 24 months. Ensure that you negotiate an extension of your lease term to at least the end of the period during which your deferred rent is payable! You want to be assured that you have premises from which to run your business for the period that those deferred rental payments are to be made.
  2. If the balance of the lease term is more than 24 months, your deferred lease payments will be payable over the remainder of the lease term.

You are still bound by the lease terms

Be aware that you and your Landlord are still bound by all other terms of the lease. If you fail to abide by the remaining lease terms, you may forfeit the protections of the Code of Conduct.

Change in trading hours, including ceasing trading

If you cease trading altogether, or reduce trading hours, due to COVID-19 and your lease includes provisions requiring you to be open set hours and/or days, the Landlord cannot enforce these provisions.

Review your insurance policies

Ensure that you review any insurance policies carefully to see if they provide any relief, particularly where you are unable to trade at all.

Get legal advice

When negotiating any change to lease terms, including rent, it is important that you obtain legal advice to ensure that:

  1. You are not inadvertently breaching the Code of Conduct, and in time, relevant state legislation.
  2. All agreements between the parties are documented appropriately.

It is important that even through these uncertain times, Landlords and Tenants look to the future and consider what the best outcome will be at the end of the crisis.  For Tenants the most important thing will be to have premises available which allow them to recommence a viable business with as little disruption as possible. For Landlords, the goal will be to have their premises leased to a Tenant with a viable business who can quickly resume normal rent payments.

The constantly evolving situation 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.

By working together, both Landlords and Tenants are more likely to survive the disruption with a viable business intact.