The Prime Minister has released a Code of Conduct (the Code) to provide relief to commercial tenancies that are suffering financial hardship due to COVID-19. It applies to businesses which have an annual turnover of less than $50m and have suffered 30% or more loss of revenue (compared to the same period in the previous financial year) as a consequence of COVID-19.
Reduction in rent
Tenants are entitled to a reduction in rent that is proportionate to the revenue loss suffered by their business. The reduction includes a waiver, which is a complete forgiveness of rent where the tenant will be under no obligation to repay. The waiver must account for at least 50% of the overall rent reduction with the balance of the reduction coming by way of deferral. For example, if your business has suffered a 40% loss as a result of COVID-19, you will be entitled to a minimum of 20% of your rent being waived, and 20% of your rent being deferred. If your business has been shut down all together and so is experiencing a 100% loss of business, you will be entitled to a minimum of 50% of your rent being waived, and the remainder being deferred.
Repayment of deferred payments must be spread out over the balance of the lease term and for a minimum period of 24 months, whichever is greater (unless otherwise agreed). The tenant will not be obliged to repay deferred rent until after the government declares the pandemic has ended or the lease ends, whichever occurs first, taking into account a reasonable recovery period. The landlord may not levy on interest, fees, or charges on account of these reductions. If the landlord and tenant are unable to reach an agreement for the reduction of rent, the matter should be referred to an applicable dispute resolution process or binding mediation.
Rights and obligations
Under the Code, landlords must not terminate leases due to non-payment of rent during the pandemic or the reasonable recovery period. Similarly, tenants must remain committed to their lease, subject to any waiver or deferral amendments applied to their tenancy under the Code. Any benefit enjoyed by a landlord as a result of reduction in charges such as land tax, council rates, or insurance should be shared with the tenant. In circumstances where the tenant business is unable to trade all together, any other expense or outgoing owed to the landlord should be waived.
Uncertainty remains
There are some uncertainties arising from the Code. Firstly, it is unclear whether the agreed rent reduction should be reassessed each month based on the changing profit and losses of the business. It is also uncertain whether a business with multiple lease agreements, such as a retail chain, should calculate their losses across all their locations or separately for each lease.
Moving forward
The Code will be legislated for each state and territory. The Code will not supersede the forthcoming legislation, but is intended to ‘compliment’ it. When this legislation has been passed, business owners can expect a greater degree of certainty with the finer details of their rights and obligations with respect to their commercial lease agreements.
If you have a question or concern about what this means for your lease, whether you are a tenant or a landlord, reach out to us on 03 8691 3111, or email us at hello@alliedlegal.com.au.
