Caitlin Bowman: Do you currently own or rent a commercial premises?
Hi, I’m Caitlin Bowman. I’m one of the senior lawyers here in our business and property team at Turnbull Hill Lawyers. I’m here to talk about COVID-19 and the code of mandatory conduct in relation to commercial leases.
The government has introduced a code that sets out how landlords and tenants are supposed to negotiate during the COVID pandemic, and what needs to happen for both parties. If you’re a tenant at the moment struggling to pay your rent is quite a real factor of your business. We’re here to provide you with your legal options in relation to the code of conduct and what you can do moving forward.
What is the mandatory Code of Conduct? It’s a code that sets out some basic principles that both landlords and tenants need to follow to negotiate a rent reduction moving forward. It also ensures that both parties can negotiate a best and fair outcome for both of them as well. Does the code apply to you? If you’re a business that has a turnover of $50 million or less, you’re eligible for the JobKeeper program, and you have a commercial, retail, office or industrial lease, then the code will apply for you. The code hasn’t been written into state and territory legislation as yet, so we’re not clear on how it will be enforced. We do know, however, if there is a dispute between the parties there will be mandatory mediation that has to occur.
What relief is available to you as a tenant under the code? There has to be a rent waiver in the form of either a rent deferral or a rent-free which is proportionate to the reduction in your business.
Take for example, that you are a beauty therapist and due to a government direction, you’ve had to close your doors. You would, therefore, have had a 100% loss in your business profit during this period. Your landlord is required to provide you with 50% rent-free during this time, and also a 50% deferral of rent. That 50% deferral of rent will need to be repaid over the lesser of 24 months, or the remaining term of your lease depending on whichever is greater.
Take another example, you’re a restaurant and due to the government shutdowns, you’ve changed from a solely eat-in restaurant to now take-away only. You’ve had as part of this a reduction in your sales of 40%. You’ll still have to pay your rent moving forward, however, your reduction of 40% will have to be 20% rent-free, and 20% as a rent deferral. You’ll need to negotiate this with your landlord. Both you and your landlord can come to a different arrangement. However, this is the bare minimum that the landlord has to provide to you as a tenant.
There are other principles that apply to you as the landlord pursuant to the code.
You aren’t able to charge any rent increases during this period.
You aren’t able to draw on your tenants’ security including security bonds and bank guarantees.
You also aren’t able to terminate the lease at this time due to nonpayment of rent.
You can’t charge a tenant interest on unpaid rent during this time.
If your tenant should open less hours or cease to trade, you also can’t penalise them for that.
If you get a reduction from some authority in relation to your council rates, land tax, etc, you have to pass that on to your tenant.
You should also be negotiating with the tenant for an extension of the lease for whatever timeframe they’re affected by the COVID pandemic.
If you’re a tenant, you have to comply with the terms of your lease during this time, otherwise, you may forfeit your protections under the code. You have to act transparently and in good faith in your negotiations with the landlord, which may include providing bank account statements, turnover and profit and loss of your business and any other documents that are required to show that you’ve had a reduction in business in this time.
A few points to consider when you’re negotiating with your landlord.
Firstly, you should assess your situation. It may be that we’re in this situation for a while so it is important to have a long-term look over your business. It can be quite stressful during these times to review this, however, it will put you in the best negotiating position if you can understand your business situation.
You should also review your lease as the lease terms remain in place during this time as well as the code.
It’s important to also review any security that you’ve got in place that could be at risk, including personal guarantees and bank guarantees. You can then put your proposal forward to your landlord. It’s best to have this in writing and have your best outcome that you want in this negotiation, noting that there may be a counteroffer between you and the landlord and a bit of negotiation that occurs. You should also remember that the code is the minimum that you’re able to have in this time.
Lastly, make sure your agreement is signed by both parties to ensure that there’s no disputes down the track in relation to what has been agreed upon.
Some key points to take away from this are:
if you’re economically affected by the COVID pandemic, you are able to point to the code to get some rent relief during this time.
It’s also important to note that landlords can’t terminate your lease during this time for nonpayment of rent and can’t charge interest on unpaid rent as well.
As things are rapidly changing in this area, we strongly encourage you to ensure that you’re keeping abreast of the changes. Noting, however, that we’ll be providing more information as it comes out through the government.
If you have any questions or want to discuss anything further, please feel free to call us here at Turnbull Hill Lawyers.