On 12 May 2020, the Leases (Commercial and Retail) COVID-19 Emergency Response Declaration 2020 came into effect in the ACT. This instrument gives legislative effect to the Mandatory Code of Conduct previously announced by National Cabinet. It applies to leases entered into before 7 April 2020, where the tenant is a COVID-19 impacted business which is eligible for the Federal Government’s JobKeeper programme.
The purpose of the Code of Conduct is to put in place a set of good faith principles by which landlords and tenants must abide in negotiating amendments to their lease arrangements to best manage the impacts of the COVID-19 pandemic.
One of the key ‘leasing principles’ set out in the Code is that landlords must offer tenants proportionate reductions in rent payable (in the form of waivers and deferrals) based on the reduction in the tenant’s trade due to COVID-19.
Many landlords and tenants may currently be negotiating, or have already agreed upon, the terms of their rental relief. Whilst in some cases parties may consider relying solely on a verbal agreement or a brief exchange of emails to document their arrangement, both landlords and tenants should be careful to ensure that any agreement on rental relief is clearly and accurately recorded.
Potential issues that may arise if the agreement is not properly documented include:
- The agreement may not be legally binding on the parties. In order to ensure both parties are legally bound, a formal deed of variation and potentially a registration of that variation may be required.
- The agreement may not be legally binding on guarantors to the lease. Often the tenant’s obligations under a lease are guaranteed by a third party, and it is important to ensure that any guarantors are also party to any variation.
- The agreement may not be legally binding on potential successors. For example, if the landlord sells the premises, or the tenant sells their business and seeks to assign the lease.
- Variations that have been inadequately or poorly set out can risk future disputes where the parties cannot properly recall or agree upon the terms of the initial arrangement.
- Poorly documented variations may also have unintended consequences, including voiding provisions of the lease or potentially surrendering the lease itself.
In seeking to clearly document any rental relief arrangement, important considerations for both parties include:
- Properly capturing all aspects of the arrangement – Is rent being waived or deferred? How does that impact any future rent reviews? Does the arrangement include outgoings relief? What is the term of the arrangement? Is there capacity to extend the arrangement (noting the uncertainty of the current circumstances)? Is there any change to the term of the lease?
- Consent – Is the landlords mortgagee’s consent required? If so, is the arrangement conditional on that mortgagee’s consent?
- Registration – If the term of a registered lease is to be extended (particularly in cases of a rental deferral or abatement), then a formal variation of the lease that notes the extension should also be registered.
- Confidentiality – Each rental relief agreement will be specific to a particular landlord and tenant (and their financial positions). A confidentiality clause may therefore be an important consideration, especially where one landlord has a number of tenants.
- Eligibility – The landlord may wish to include a provision requiring tenants to provide relevant evidence demonstrating their eligibility for relief under the Code, both initially and on an ongoing basis.
Landlord Relief – for landlords who may be seeking their own flow on relief, for example relief in relation to commercial land rates, then a written agreement documenting the arrangement may be required.
If you are a landlord or tenant requiring assistance in documenting a rental relief agreement, or other leasing issues arising in the current environment, Tetlow Legal are able to assist. Please contact Anthony Simpson or Emma Bragg on (02) 6140 3263 or [email protected] or [email protected].