Last week the National Cabinet announced some basic principles to guide the Tenant / Landlord relationship during COVID19. Building upon those principles, key institutional bodies released a joint statement which:
- expanded upon the initial guidelines; and
- provided further commentary regarding the potential practical application.
On Friday Scott Morrison announced that the Government will legislate and form a mandatory Commercial Lease Code of Conduct. It will be based upon the tentative principles outlined by those key industry bodies last week. We raised a number questions regarding the proposed code (see: Do we need a leasing code of conduct for COVID19?). The questions that we raised in that article are still somewhat unanswered, however here is a list of items that are now becoming clearer.
Who does the code specifically apply to?
It seems as though it will apply to both retail and commercial Tenants.
As we expected, there will be a criteria that a Tenant needs to meet before being protected by the Commercial Lease Code of Conduct. In particular:
- experiencing a minimum of 30% revenue decrease; and
- have a turnover of less than $50 million per annum.
Financial distress: What is the criteria?
It seems that as long as the Tenant meets the application criteria above, then a proportionality principle will apply. Effectively, this could mean that even where Tenants have the financial resources to pay the rent under the lease, they may not have to. We are anxious to see the final drafting surrounding this point.
Many retailers have closed either due to safety concerns or on a cost vs benefit basis, rather than being required to close as part of the social distancing measures. There remains a looming question surrounding how these elective closures will be treated under the Commercial Lease Code of Conduct.
Following the proportionality principle, it’s likely that the rent will decrease by the some proportion as the Tenant’s gross sales or revenue. For example: If a Tenant’s gross sales have decreased by 70% compared to the same time last year, then the rent will decrease by 70%.
If you are a Tenant that has had to close and cease trading then the Commercial Lease Code of Conduct could effectively mandate that you pay no rent.
The principle of proportionality means that the loss needs to be balanced. In terms of the Tenant / Landlord relationship, this may mean that where you have been given a 3 month rent free period, the lease is then extended for the same amount of time. This provides the Landlord with an additional 3 months letting security.
The National Cabinet have not come to an agreement on the final drafting. Scott Morrison has cited the reason being an inappropriate relief for Landlords. Notwithstanding, we would expect the Commercial Leasing Code of Conduct to be finalised in the coming week.
The overall the intention of the code is clear though:
“What is important as part of this code is that both parties negotiate in good faith” – Scott Morrison
This is what needs to be happening around the country, now. It has been made very clear that it is no longer appropriate or acceptable for Landlords to reject requests for rent relief.
If you are struggling to negotiate with your Landlord, you can make an appointment with a Liberty Leasing consultant here, or call us on (07) 3359 8273.