How do I negotiate with my Landlord during COVID-19? 

Following the release of details on:

• the basic test and the alternative test for JobKeeper; and
• The National Cabinet Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19 (“the Mandatory Code”)

we now, at least, have some more clarity as to how negotiations between landlords and tenants should play out.
There has been much confusion about JobKeeper, the code and how to negotiate rents since the coronavirus pandemic began for tenants and landlords alike.

Are landlords playing their part?

Very few landlords are putting up a hand to be helpful without the tenant taking the case to the landlord. Although landlords and tenants are supposed to come together and talk, the reality is that most landlords are simply folding their arms living in hope that the tenant will just pay the rent and outgoings – and not be aware of their rights under the Mandatory Code. The reality is that tenants need to bring their case-and they need to bring it strongly in order to take advantage of what is legally on offer at this present and unprecedented time.

What can I ask for as a tenant?

The first point to establish is whether you qualify for the Job Keeper supplement. If you don’t, you can still negotiate with landlord on a “what is fair” basis. The only difference is that you will not be able to enforce your position. It will merely be a commercial negotiation. You will not be able to take a landlord to a court or tribunal, if no deal could be struck, unless there is some basis in your lease. That said, with the parties having to work together in the future, you would hope that your landlord would be amenable to being reasonable in what are difficult circumstances for most businesses.

While the commentary below will thus apply specifically to those who qualify for JobKeeper, such commentary may still be helpful to you on some level. It is certainly recommended that you engage legal advice even if you don’t qualify for job keeper because an experienced and savvy lease lawyer may be able to find an angle which is helpful to you in argue your case to the landlord.

The Mandatory Code

The Mandatory Code is extremely helpful to tenants who qualify for JobKeeper.

Part of the purpose of the Code is as follows:

1. The purpose of this Code of Conduct (“the Code”) is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.

Under the Mandatory Code, a tenant can ask for a reduction in rent proportionate with reduction in turnover for a particular month or particular quarter. To determine this, the job keeper principles will apply and will need to be assessed in relation to the relevant GST turnover as compared with the comparison period in 2019.This is complex in itself and requires an understanding of JobKeeper in order to properly apply the test.

It is a simplified process if the tenant’s business is closed entirely, particularly if it is pursuant to a government directive. It is unclear as to whether a tenant’s choice to close the doors, when not specifically legally required to do so, will be sufficient to comply with the eligibility requirements under the Code.

In relation to the rent reduction, of a tenant who qualifies, at least 50% of the reduction must be by way of waiver. That means that essentially that component is treated as a rent-free period. The remaining part of the rent reduction can be on a deferred basis, being a minimum of 24 months but up to the length of the term of the lease, whichever is longer. This should provide excellent relief to tenants who have been affected.

The relevant clause in the Code reads as follows:

4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.

More than 50% waiver is possible in particular circumstances namely, “where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement”. What this ultimately means will be based on individual circumstances and will need to be carefully considered in making an approach to the landlord -and certainly in terms of what is ultimately agreed upon.

If you have not closed the doors, you will still be entitled to a substantial rent reduction but as we have noted above, it will need to be proportionate. In many respects, this is an even more careful negotiation that needs to take place with the landlord.

In relation to outgoings, if the business cannot trade, in most cases outgoings will be waived in full i.e. not need to be repaid at some deferred date. In the event that, as the tenant, you are able to trade i.e. the doors are open for business, you will not be able to rely upon this benefit. However, you should still be able to obtain any benefit that the landlord obtains by way of discount in relation to any particular outgoing. In other words, the lender will need to pass this benefit on to the tenant.

The Mandatory Code is an absolute essential to rely upon if you are a tenant and you have access to JobKeeper.

Our commercial leasing team can provide you with up-to-date and relevant advice about the Mandatory Code and strategic advice as to how the provisions can best be applied to your individual circumstances. We are already negotiating on behalf of tenants with landlords and therefore navigating the path through how all this works in practice to the benefit of the tenant. You want to make sure that you claim everything you possibly can. Businesses who have been affected by the coronavirus should ensure that they take the time to see if they qualify and how the rules apply to them.

To contact us, please call our commercial lease lawyers on 1300 907 335 or otherwise please complete the enquiry form on this page and will get right back to you.

A copy of the code can be found here: Mandatory Leasing Code.