The following outline the basic concepts of the COVID-19 Mandatory Code of Conduct for Commercial Tenancies.

 

Landlord and Tenant principles

  1. Maintain business continuity;
  2. Negotiate appropriate temporary leasing arrangements;
  3. Negotiate in good faith;
  4. Agreements; consider impact on revenue, expenses and profitability;
  5. Parties work together in dealing with third parties e.g. banks, governments, etc. in regards to operation of code;
  6. Parties consider risk of default carried by landlord;
  7. Considered on case-by-case basis;
  8. Include lease structures, how rents are evaluated and arrears expiries holdover.

 

Leasing Principles

The principles below are outlined by the Small Family Business Ombudsman:

  • Applies to business turnover less than $50 million; and if
  • Turnover has fallen by more than 30% and therefore eligible for Job Keeper;
  • Parties remain committed to their leases;
  • Leases cannot not be terminated for non-payment of rent or recovery period;
  • Rent reduction to be proportionate to tenant’s loss of income during pandemic period: e.g. if turnover falls by 50%, rent reduction equivalent to 50% may be deferred (waivered). Businesses can seek to waive the “deferred” amount by negotiation; (remember for some businesses at some point the breakeven point might be that even if no rent is paid; the business cannot be viable)
  • Repayment up to 24 months or term of current lease. May only start after pandemic ends (note this becomes a debt obligation for that portion of rent the tenant has not paid);
  • If lease does not offer tenure for that period it can be extended (part of debt claw-back);
  • No fees and charges for non-payment;
  • Any benefits from banks or statutory fees and charges must be passed on to tenants proportionately;
  • No rent increases can be passed on during period of pandemic and period of time after (except turnover rents);
  • Cannot be penalised for shortening trading hours or not trading;
  • Landlord may not call upon tenant’s security e.g. bank guarantee personal guarantee or bond;
  • The parties can be referred to binding mediation in respective states including to terminate leases.

 

See below an example of possible draft letter you can adapt if your business has been significantly impacted by coronavirus restrictions, and you want to engage in a rent negotiation with your Landlord.

 

Dear Landlord,

Covid-19 is having a large impact on our [insert business name]: urgent request to vary lease terms.

The Coronavirus/ Covid-19 is having a big impact on our business.

Whilst our product is mainly necessity spending; it does also need passing traffic to generate sales. In addition there are no longer predictable consumer outcomes. Their patterns of behaviour are confused.

As you know, when sales and margins start to compress (decline), one’s fixed costs get more disproportionate. Rent is one of those expenses.

The business still needs to pay variable expenses including wages, superannuation, some of which are fixed and or variable expenses.

Rest assured, we want to be here when this virus abates, and are seeking that you share the “pain” with us.

Our Association advises that:

Covid-19 Mandatory Code of Conduct for Commercial Tenancies envisages that Landlord and Tenant/s seek to:

  1. Maintain business continuity;
  2. Negotiate appropriate temporary leasing arrangements;
  3. Negotiate in good faith;
  4. Agreements consider impact on revenue, expenses and profitability;
  5. Work together in dealing with third parties e.g. banks, governments etc. in regard to operation of code;
  6. Consider risk of default carried by landlord;
  7. Each matter is considered on case-by-case basis;
  8. Include lease structures, how rents are evaluated and arrears expiries holdover.

The broad principle is that lease rent reductions are proportionate.

We can confirm that we have fine-tuned reduced staff hours, have staff registered on JobKeeper Payment, etc. to mitigate losses.

To give us the best chance of succeeding and coming out of this pandemic with reasonable success we are seeking:

  1. To write a short note to you within 7-days of the commencement date of each new month;
  2. To provide you with our monthly GST free sales for the previous month;
  3. To pay the pro-rata amount relative to a 1/12th proportion of our previous financial year’s sales;
  4. That no portion of this amount withheld will become a deferred amount (to give us the best chance of success when the pandemic is over).

This submission is made such that we are sharing in the unexpected risk event, without the landlord having to find another tenant amongst possibly hundreds in a few months’ time.

It could be that this is not suitable and or that a pro-rata reduction with all concessions might need fine-tuning.

Thank you for your understanding and support.

Yours sincerely,

[Enter your full name]

[Enter business name]