Australia: Landlord and tenant considerations continued; Mandatory Commercial Tenancy Code

Introduction

Since our publication in March 2020, there has been much anticipation about the Government’s response to assist landlords and tenants through this period.

Just before the Easter Break on 7 April, the National Cabinet agreed for the Mandatory Commercial Tenancy Code (the Code) to be legislated in each state and territory jurisdiction. It is intended that the Code comes into effect in all states and territories from a date following 3 April 2020. At the time of publishing this article no state or territory has specifically enacted all of the provisions of the Code.

However in Queensland while no legislation has been passed, on 9 April, the Palaszczuk Government unveiled a package of measures to implement the freeze on evictions for residential tenants and has launched an online rental hub at https://www.covid19.qld.gov.au/the-hub to provide information and resources to support discussions between residential property owners and renters. Where parties cannot reach an agreement, there will be compulsory conciliation for COVID-19 related disputes between tenants and landlords through the Residential Tenancies Authority. In asking tenants and property owners to find a solution that works for all parties, it is proposed that the RTA will have clear guidelines that prohibit a requirement to draw on superannuation, or sell basic personal assets.

Further, on the same day the Palaszczuk Government, in a bid to protect retail and commercial tenants, announced that a landowner can apply for land tax relief if they meet criteria including:

• the landowner rents all or part of a property to a tenant/s OR all or part of a property is currently available for lease; AND
• at least one tenant’s ability to pay their normal rent OR the landowner’s ability to secure a tenant is affected by the COVID-19 pandemic;
• the landowner provides rent relief to an affected tenant/s commensurate with the amount of the land tax rebate OR if the property is unable to be leased, the landowner requires land tax relief to meet their financial obligations (such as debt repayments); and
• the landowner complies with new leasing requirements, even if the relevant lease is not regulated.

As from today Queenslanders will be able to apply for land tax relief, by going to qld.gov.au/landtax.

Also over the Easter break, the NSW Government announced $440 million in land tax relief to commercial landlords if they pass the savings on to tenants through a rent reduction. Eligible landlords will be able to apply for a land tax concession of up to 25 per cent of their 2020 (calendar year) land tax liability on relevant properties. A further land tax deferral for any outstanding amounts for a three-month period will also be offered to landlords who claim the land tax concession. The NSW Government confirmed it will seek to give legal effect to the Code as soon as possible.

The Code

A copy of the Code is attached to the statement issued by National Cabinet and is available here.

The Code applies to retail, office and industrial tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic. The Code does not apply to residential tenancies.

Recognition for tenancies under the Code is defined by their eligibility for the recently introduced JobKeeper programme, together with an annual turnover of up to $50 million.

The Code sets out a number of helpful and important guiding principles for consideration by landlords and tenants, including the requirement for landlords and tenants to act transparently and provide one another with sufficient and accurate information.

Most significantly, the Code requires a landlord to provide rental relief to a qualifying tenant by the same proportion as the loss of revenue experience by a tenant. Half of the rent relief must to be given in the form of a rent waiver, while the other half can be deferral of rent spread over the life of the lease and not less than 24 months.

Also important under the Code, a landlord must not terminate a lease or draw on a tenant’s security. Similarly, tenants must honour the terms of a lease.

The Code states that the $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level). On this basis, it is understood the Code will also apply to parties in a sublease arrangement.

Practical Considerations

While the legislation is pending, the Code gives landlords and tenants some direction about how to navigate through the COVID-19 pandemic. More than ever, parties should now be considering the following:

Instigation

The Code is consistent with our previous recommendation that landlords and tenants must get together to discuss what arrangements can be agreed between them to sustain both parties through this crisis.

There are certainly no clear winners in the current situation and compromises will be need to be made by both landlords and tenants to come out the other side of this crisis – now is not the time for either side to be opportunistic.

Determining the reduction in business turnover

In preparation for the legislation, landlords and tenants should consider what information will be required to assess a tenant’s changed circumstances. Relevant information will likely include:

• An audited statement of a tenant’s financial position to show eligibility for the JobKeeper scheme
• P&L statements and/or balance sheets
• Financial advice with confirmation as to the disruption experienced by the business due to COVID-19
• Details of debts of a tenant’s business and whether any other relief is available to a tenant
• Details of what arrangements a tenant has put in place for the ongoing operation of the business
• Whether the tenant holds business interruption insurance that covers the payment of rent and outgoings and whether it is able to make a claim under that policy

Structuring the rent relief

How relief is documented and structured will be up to the particular landlord and tenant. If tenant has not experienced a reduction in business turnover, there should be no entitlement for relief.

As an example: if a tenant’s revenue has fallen by 100 per cent, under the Code at least 50 per cent of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30 per cent, under the Code at least 15 per cent of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.

Landlords and tenants need to ensure that any agreements about rent abatement, suspension of trade and so forth are put in writing. In this rapidly changing environment, it is not advisable to rely on a handshake deal or friendly discussion. A formal variation to a lease will need to be registered on title if the lease is registered (or required to be registered).

Mediation

Where landlords and tenant cannot reach agreement on leasing arrangements (directly linked to the COVID-19 pandemic), under the Code either party may refer the matter for binding mediation.

(including the further administrative burden on those tribunals).

Next steps

Norton Rose Fulbright are currently developing a suite of documents to record the types of arrangements that we expect will come into play over the next few months, including rent abatement deeds, variation documents, and checklists. We are also continuing to provide advice to both landlords and tenants who are seeking guidance around their present rights and obligations as well as how best to navigate through the Code.

If you require any assistance with negotiations, including being properly prepared with a tailored checklist for your business needs, please contact us. In the meantime, we will continue to keep you updated on relevant matters, including the enactment of the legislation.