National Cabinet has published a code of conduct for leasing to apply during the period of the COVID-19 pandemic (defined by the period during which the Jobkeeper programme is operational) and a reasonable recovery period after the pandemic ends (referred to in this note as the ‘moratorium period’).
There is to be State legislation implementing a regime for this. Draft legislation has not yet been published, so we don’t know the fine details. We can draw on the Code of conduct to see what will happen generally when the legislation is implemented.
The objective is to share the financial risk and cashflow impact during the pandemic. It is intended landlords will agree ‘tailored, bespoke and appropriate temporary arrangements’ for each tenant, accepting that the circumstances of each tenancy are different.
When will the Code apply?
The Code is expected to apply retrospectively from 3 April 2020. It will continue to apply for the moratorium period. The exact effect of retrospectivity on matters such as amounts owed prior to 3 April will depend on the wording of the legislation.
To whom will it apply?
It will apply to commercial, industrial and retail tenants who are eligible for the Jobkeeper programme – essentially, those with a turnover under $50million per annum who have lost 30% of their turnover compared with the same period in 2019 and who employ people. It does not apply to tenants with higher turnovers.
The Code also says it should apply ‘in spirit’ to all leasing arrangements for affected businesses having regard to their size and structure. This should be read as a non-binding admonition for landlords to be kind to tenants who aren’t eligible for the Jobkeeper programme.
What happens to rent?
Landlords must waive rent and defer rent depending on the reduction in the tenant’s turnover during the moratorium period. If the tenant suffers a 100% drop in turnover, the landlord must waive 50% of the rent and defer payment of the other 50% to be amortised over the balance of the lease term or for 24 months, whichever is greater.
If a tenant lost 100% of turnover in one month and then lost 75% in the next month, the landlord must offer 50% waiver in the first month and 37.5% (half of 75%) in the next month, and so on.
The Code says a waiver of more than 50% should be made ‘where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement’.
If the tenant agrees, these minimum requirements for waiver and deferral can be relaxed.
What about arrears of rent owed at 3 April?
The waiver and deferral applies to ‘rent payable’. It would make sense for this to mean rent payable for the moratorium period but that is not entirely clear.
Landlords can’t terminate leases for non-payment of rent during the moratorium period. We expect that means non-payment of rent accrued at any time under the lease.
Are outgoings covered?
Any reduction in statutory charges that are recoverable under the terms of the lease must be passed on proportionately to the tenant (e.g. land tax, rates) in every case.
Under numbered paragraph 8 of the Code, landlords ‘should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade’. It only applies when the tenant is ‘not able to trade’ rather than when the tenant is suffering a reduction in turnover. It only applies ‘where appropriate’, whatever that means.
How are loan savings dealt with?
The landlord is required to share with the tenant any benefit the landlord receives from a financial institution for deferral of loan repayments. The sharing should be proportionate.
Can costs be passed on?
Landlords cannot charge to the tenant fees, interest or other charges (e.g. accounting and legal fees) in relation to the waiver or deferral of rent.
Can landlords call up securities?
Landlords must not draw on cash bonds, bank guarantees or personal guarantees during the moratorium period.
Can the tenant extend the lease?
Paragraph 12 of the Code says a tenant should be given an opportunity to extend its lease for a period which is incomprehensible. ‘This is intended to provide the tenant additional time to trade, on existing lease terms’ (whatever that means) ‘, during the recovery period after the COVID-19 pandemic concludes’.
One hopes the legislation will be clearer on this aspect.
What about annual rent increases?
Landlords must ‘agree to a freeze on rent increases for the duration of the moratorium period. This does not apply where rent is based on turnover.
Obligation to trade?
Landlords can’t enforce tenants’ obligations to trade during the pandemic.
What to do?
Parties can begin discussions about this without waiting for the legislation. They must negotiate in good faith. Both parties must disclose all relevant information. The tenant must disclose its revenue, expenses and profitability.
Arrangements should allow for review, probably monthly, of the tenant’s position. It is likely things will start to improve during the moratorium period so that the relief for the tenant should change as the tenant’s turnover changes.
Arrangements should be carefully documented because they may apply for more than 2 years.
If the parties can’t agree on the arrangements, the Code provides for ‘binding mediation’. That would be expensive and time consuming. Avoid it if possible.
Please contact us if you would like to discuss any aspect of this.