Key aspects for your business or organisation to consider in complying with the Code
If your commercial lease is covered by the Code, you will need to discuss with your landlord/tenant counter party taking steps to work out a temporary lease arrangement to suit your situation. It will be important:
- for landlords to understand the nature of their tenant’s financial and business circumstances so as to best preserve the relationship, and seek the right financial information from their tenant for that purpose;
- for tenants to be prepared to deal openly with landlords to achieve an amicable outcome that enables them to survive and recover from this crisis; and
- as a first step for parties to understand whether their relationship is governed by the Code. In particular:
- is the tenant eligible for the JobKeeper programme, and
- how does its assessment regime potentially impact the extent of any reduction in rent.
Some measures you could consider for a temporary arrangement include:
- a combination of rent waiver and deferral for a permissible period under the Code that can maintain the viability of the tenant’s business;
- extending the lease for an additional period to add value to the tenure, on similar or different terms to the existing lease term;
- varying the security arrangements;
- engaging key stakeholders such as the bank to make arrangements in respect of any relief on mortgage repayments.
Mortgagee / bank requirements
- when negotiating these temporary arrangements, it is important for landlords and tenants to be mindful of any mortgagee lease consent or tripartite arrangement requirements of the landlord’s or tenant’s bank;
- these arrangements may require the bank to be consulted if there is any material change to the lease arrangements;
- the Prime Minister’s announcement on 7 April 2020 noted the expectation that banks and financial institutions are expected to support landlords and tenants with appropriate flexibility to implement the Code.
Subleases
- tenants and subtenants will likely need to comply with the Code as between themselves if the subtenant is an ‘SME tenant’.
Timing and commitment
Be careful not to commit to a temporary arrangement without taking into account:
- the final form of the legislation once it is passed by the relevant Parliament;
- correspondence offering any new arrangement should clarify that it is not intended to be binding without first signing formal lease documents to your satisfaction. Indeed, the electronic transactions legislation could result in email correspondence giving rise to an agreed variation to a lease.
Retail lease parties will need to consider the effect of temporary arrangements on their ongoing obligations, such as disclosure of outgoings, and notice of option expiry dates.
Keep in mind that any measures taken are temporary for the purpose surviving and recovering from this crisis. While they might be financially detrimental in the short term, the reality is having to find a new tenant or premises/landlord in the current and post COVID-19 environment could be a risky, costly and complicated exercise.
If your commercial lease is not covered by the Code:
- you may still need to consider negotiating temporary arrangements with your landlord or tenant;
- in this case, the Code is a useful guide to issues for landlords and tenants to consider. It brings a nationally recognised set of leasing principles to the table as a starting point for the conversation.
If you are negotiating a new commercial lease that could be covered by the Code, you will need to consider:
- how the mandatory requirements of the Code could impact your lease going forward;
- for example, what happens if the tenant cannot pay the rent due to the pandemic, and what form of security is suitable?
Next Steps
Once the Code has been passed by legislation and commences, proposed temporary arrangements can be fully negotiated and documented more confidently. The indication is that Victoria could give the Code retrospective effect from 29 March 2020.
In many situations, temporary arrangements will require a deed of variation of lease or waiver document. It should take account of existing lease provisions and retail lease legislation (if applicable). Taking these steps will help mitigate the risk of disputes and allow leasing parties to move forward in their relationship with more certainty.
Keeping open communication alive during this time, in the manner required by the Code, will be key for landlords and tenants to deal with the challenges of COVID-19.
If you require any assistance with negotiating or preparing lease documents or have any leasing questions, please get in touch.
