Update 2 - effects of Covid-19 on commercial tenancies (current at 2pm, 7 April 2020)

This is update 2 of 9 - for our latest article on this topic see here.

The Prime Minister has today announced that National Cabinet has agreed on a path forward for the protection of tenants and landlords.

The protection will be legislated by adoption in each state of a mandatory industry code. The announcement made at press conference at 1.30pm 7 April 2020 set out the basic principles of the code as follows:

• the code will apply where the landlord or the tenant qualifies for the JobKeeper program and has a turnover of less than $50,000,000; • the code will prohibit landlords from drawing down on a tenant’s security (assumedly the code will allow a landlord to do that if the tenant consents but that was not stated in the press conference); • landlords will be prevented from terminating leases – there was no discussion in the press conference as to whether that will be a blanket ban or will apply only in respect of defaults arising as a consequence of or in connection with coronavirus; • landlords will be required to reduce rent proportionally to the trading reduction in the tenant’s business over the course of the pandemic. The ‘reduction’ will be allowed through a combination of waivers of rent and deferrals of rent; • the waiver element must account for at least 50% of the reduction in trading; • the deferral of rent must be allowed over the balance of the lease period and for no less than 12 months – this means tenants with less than 12 months left on their term will be entitled to continue paying the deferred rent element beyond the end of the lease; • compliance with the code will be overseen by a binding mediation process – we presume that if the matter is unable to be resolved at mediation the code will contemplate escalation to an appropriate forum (i.e. to VCAT in Victorian retail situations).

The Prime Minister did not make any mention of a ‘quid-pro-quo’ requirement (for instance adding time to the end of the lease) as was mentioned in his prior, 3 April, press conference.

To take an example - these principles would seem to indicate that a tenant whose turnover is reduced to nil (for instance where the business has been compulsorily shut down) for a period of six months might expect a 3 month rent-free period and three months’ rent deferred to be paid over the balance of the term of the lease.

We note there appears to be some conflict in the principles as set out in the press conference (the concept of proportional rent reduction not being exactly in line with the concept of a 50% waiver/50% deferral) – we expect that will be clarified once the industry code is available.

The proportionality principle will apply in respect of the lost revenue "over the course of the pandemic period" - that indicates that landlords and tenants will need to continue to re-assess and perhaps reach new agreement throughout the course of this pandemic.

The press conference covered only the overarching principles of the industry code. Once the industry code is released we will publish a further update.

It would appear that the code will still require agreement between landlord and tenant as to the operation of rental waivers and deferrals. It is critical that any agreement that is reached is properly documented. It is particularly important for landlords to ensure appropriate execution by any guarantor of the lease so as to maintain the enforceability of the guarantee as applying to the varied terms.

Eastern Bridge can assist in negotiating with your landlord or tenant, advising in relation to any dispute arising and documenting any agreed variation.

A template deed of variation of lease is available for free on the Eastern Bridge homepage. Paul Nunan Director Accredited Specialist | Commercial Leasing