As a part of COVID-19 response, the National Cabinet has implemented a mandatory code of conduct for commercial leasing that applies to all tenancies with an annual turnover of up to $50 million. This article will enlighten the principles for negotiating commercial rent during COVID-19.
With many businesses facing a huge fall in revenue due to the pandemic, the government has encouraged landlords, tenants and financers to agree on new arrangments to provide rental relief. The code applies to those tenants who are suffering financial stress or hardship as a result of COVID-19 and are eligible for the Commonwealth Government’s Job Keeper payment.
The objective is to share in a proportionate and measured manner the financial risk and cash flow impact during the COVID-19 pandemic and at the same time balance the interests of both tenants and landlords.
Principles of negotiation between the landlord and the tenant.
What leasing principles should both landlords and tenants adhere to after the commencement of negotiation?
What if both the parties can’t reach an agreement?
Principles of Negotiation:
This package intends to ensure that landlords agree on a temporary arrangement for each tenant on a case by case basis and the arrangement will be guided by the following principles listed below:
- Landlords and tenants should work together to ensure business continuity and to aid in the facilitation of normal trading at the end of the COVID-19 pandemic.
- Landlords and tenants are required to discuss issues to enable them to negotiate temporary leasing arrangements that will be in the best interest of both parties.
- Negotiations will be made in good faith.
- Landlords and tenants are to act openly and honestly when negotiating new terms and will be required to ensure they are acting in an open, honest and transparent manner.
- Landlords are required to consider the impact that the COVID-19 pandemic has had on the tenant, including to its revenue, expenses and profitability.
- Any arrangements will include a reasonable recovery period.
- The landlord and tenants are required to assist each other in dealing with government agencies, utility companies, financial institutions to facilitate negotiations.
- All parties are required to recognise the application and legal constraints of the Competition and Consumer Act 2010 and recognise that each lease is to be dealt with on a case by case basis.
- The risk of default on commercial leases is borne by the landlord. The landlord must not seek to mitigate this risk in the process of negotiating temporary arrangements with their tenants.
- The parties need to take into consideration the differing lease structures; terms of the lease; rent reviews and determination, expiration dates and whether the lease may already have expired.
- Consideration is to be given to whether the tenant is in administration or receivership.
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What leasing principle should both landlords and tenants adhere to after the commencement of negotiation?
- Landlords must not terminate leases due to the tenant’s failure to pay rent during the COVID-19 pandemic or the reasonable recovery period.
- Tenants must abide by the terms of their lease, subject to any temporary amendments to their rental agreement following the principles of the code. Should a tenant not abide by the substantive terms of their lease they will forfeit any protections provided under the code.
- Landlords are required to offer tenants reductions in their rent by way of a waiver or deferral of their rent determined on a case by case basis.
- Rental waivers must be between 50% to 100% of the total rent owing under the lease, the tenant can waive the requirement for a 50% minimum waiver by agreement.
- Payment of any rental deferrals by the tenant are to be apportioned throughout the balance of the lease term or for no less than 24 months whichever is the greater.
- Any reductions the landlord receives for land tax, council rates or insurance are to be passed onto the tenant.
- Any benefits the landlord receives due to deferral of loan payments should be shared with the tenant, proportionate to the amount payable by the tenant under the lease.
- Should a tenant be unable to trade for a period the landlord should seek to waive recovery of any expense or outgoing during this time.
- If the tenant is required to repay any amounts to the landlord at the end of the COVID-19 pandemic this is to occur over an extended period to avoid placing a financial burden on the tenant.
- The landlord is not to charge any fees or interest on any deferred or waived rent.
- Landlords must not draw on tenant’s security for non-payment of rent during the COVID-19 pandemic or for a reasonable recovery period.
- The landlord should allow the tenant to extend its lease for a period equivalent to the waiver/deferral period to allow the tenant additional time to trade under the existing lease terms once the COVID-19 pandemic concludes.
- Landlords agree to freeze rent increases (unless the lease is a retail shop lease based on turnover) during the COVID-19 pandemic and a reasonable recovery period.
What if both the parties can’t reach an agreement?
If the landlord and tenant are unable to reach an agreement on leasing arrangements, the matter should be referred for binding mediation.
For retail shop lease disputes, the parties should apply to the Queensland Civil and Administrative Tribunal for mediation. For commercial leasing disputes, the parties should speak to a solicitor or contact us to arrange a mediation with our Principal Pravinita Singh-Pillay, who is an accredited mediator.
Our property lawyers can help you draft an agreement that would help both Tenants and Landlords.
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