NATIONAL TENANCY CODE FOR RETAILERS AFFECTED BY COVID-19
Unless a “force majeure” clause exists in a lease contract, there are no grounds under retail tenancy laws for a tenancy to end or lessees protected from rent stress due to a viral outbreak. However, Governments have acted at Federal and State levels. Details are being finalised to incorporate the National Cabinet Mandatory Code of Conduct Small and Medium Enterprises COVID-19 Leasing Principles (“the Code”) announced on 7 April 2020 into State law, and there’s financial support for many retailers and some landlords. In broad and general terms, this support is:-
- Retailers must be eligible for JobKeeper support which opens 21 April 2020 (click first white “JobKeeper” button below) and turnover less than $50m to access the protections of the Code (click second white “National Cabinet Mandatory Code of Conduct” button below);
- Parties to a COVID19 affected lease negotiation must act in good faith;
- Lessors are required to reduce lease rental payments in proportion to a reduction in a lessee’s business;
- Lessors cannot unilaterally draw on security such as bonds, bank or personal guarantees or increase rents;
- Waivers (not deferrals) are to be a minimum of half of the reduction in the lessee’s business;
- Deferrals, (suspended payments due later) must be amortised no less than 24 months and a lease extended accordingly (maybe a re-payment plan);
- The Code will be mandated in each State and Territory and also by binding mediation;
- Lessor’s cannot unreasonably ignore lessees requests about lease arrangements and, if refused, might be found acting in bad faith.
THE STATES DEAL WITH COVID-19 AFFECTED LEASES WITHIN THEIR OWN PUBLIC HEALTH AND DISPUTE RESOLUTION AND LEGAL FRAMEWORK – UPDATED TABLE AS ENABLING STATE LEGISLATION AND REGULATIONS PASS
COMMENCING LEASE NEGOTIATIONS?
EMERGING ISSUES – LESSEES BEWARE – CONDUCT OF SOME LESSOR’S
Non compliance with spirit, intent and action – (1) Some landlords and agents are not complying with the spirit and intent of the Code (click here). Some tenants are asked to sign one-way confidentiality agreements as a pre-condition to start lease negotiations. These landlords demand documents such as years of BAS, JobKeeper applications, personal and business tax records, all bank statements, profit & loss, balance sheets, assets and liabilities of directors and cash on hand and superannuation details. Some landlords request details of all Government assistance given to the lessee. Nothing in the Code requires disclosure of the kind, breadth and scope of the request these landlords make. Supplying details like this is akin to giving your landlord you PIN number to your bank account. To be clear, if you do not provide turnover information to a landlord (under the terms of your lease), yet you confirm applying for JobKeeper, it is enough to commence negotiations under the Code. It is not a requirement to provide anything more than evidence of a sales decline. If a landlord wants to verify sales, it can usually do so under the terms of the lease and pay for an audit. We can provide a free template letter to assist you with these types of landlords.
Using on-line forms to gather private information – (2) Some landlords and agents are asking tenants complete on line “surveys” and then load up highly confidential information. Nothing in the Code requires disclosures of the kind, breadth and scope of the request these landlords make and these surveys are designed to mislead you into providing information which can, and will be used against you. We can provide a free template letter to assist you with these types of landlords.
“My way or the highway” offers – (3) Some landlords and agents are offering “take it or leave it” deals. They present documents pretending to help with rent, but demand more than existing rights and use side agreements such as fit-out deeds to claw back rent. Some also demand total releases from all claims, past and future, even whilst the recovery period is uncertain. Lessees who don’t understand their legal rights should not sign these documents but obtain proper advice.
Demanding non COVID-19 affected shops subside rent for COVID-19 affected shops – (4). A profitable shop, business or unaffected shop is not required to prop up a closed or loss maker shop due to COVID-19. Some landlords are demanding to see all the results of the profit centres of multiple locations so they can demand rent at a COVID-19 affected shop.
Ignoring the Code dovetails into unfair (Cth) and unconscionable conduct provisions (State) – (5) Laws prevent lessors engaging in conduct that is, in all the circumstances, unconscionable or unfair. Lessees pressured into one-sided deals can claim money from lessors acting unfairly or contrary to the Code. For example, in NSW, 62B Retail Leases Act 1994, a Tribunal can compensate lessees in various ways:-
- having regard to the relative strengths of the bargaining positions of the parties;
- if the lessee was required to comply with conditions not reasonably necessary to protect the legitimate interests of the lessor;
- any undue influence or pressure was exerted or any unfair tactics used;
- lessor’s consistent conduct in similar transactions;
- if the lessee acted believing the lessor would comply with the Code;
- if the lessor failed to disclose conduct affecting the interests of the lessee;
- extent to which the lessor was willing to negotiate the terms and conditions (critical for the COVID-19 and recovery period);
- if the lessor acted in good faith.
Landlords claiming equipment and stock – (6). Some landlords are claiming equipment and stock in a lessee’s shop. Attempting to seize stock (known as distraint of goods) belonging to retailers (or their creditors) is illegal and also contrary to the Code. Similarly, landlords cannot seize or control equipment in the premises unilaterally. Title to the equipment may belong to a third party and cannot utilised by the landlord to give away for use by another, incoming tenant.
Landlords double dipping – (7). Landlords who benefit, but fail to disclose tax concessions, rebates or concessions from State governments or banks and not pass on the savings can be liable for misleading and deceptive conduct. For example, in NSW, S62D Retail Leases Act 1994 prevents misleading and deceptive conduct.
Landlords falsely claiming essential service status – (8). Some landlords are claiming their centre is an essential service and therefore tenants are liable for full rent as they chose to close, irrespective of footfall. This claim conveniently ignores the obvious restrictions on public movement, mass gatherings, restrictive use of premises and so forth under the State based public health Acts and local regulations.
Landlords threatening no future lease renewals or sale of the business – (9). Some landlords have been threatening (usually verbally) that if the lessee tries to obtain a rent reduction under the Code, does not borrow the money to cover the rent or go to mediation, the landlord will not renew the lease or permit the business to be sold in the future.
WA’s Small Business Commissioner, David Eaton recently called on small business tenants and landlords to work together…“Tenants may have also heard about the land tax assistance program. Landlords can apply for this, if they have given tenants the equivalent of a three months waiver on their rent. The decision as to whether to apply is for the landlord to make. This application process will include landlords asking tenants for evidence of a decline in their turnover. While this is a reasonable request, it is not reasonable to ask for [tenant’s] financial statements…”
GETTING READY FOR RECOVERY
Think about the future – If you are trying to negotiate a new rent arrangement or in dispute, it’s critical the final agreement to vary the lease is documented. There are significant risks if lease variations are not documented properly. Relying on oral agreements, a few email or simple letters to cover the deal seem easy enough and save you time and money, but may not capture the complete agreement clearly and with sufficient detail to avoid a dispute later.
Documents that record the deal – A lease is a formal legal document for land which may require variation by way of a deed or be registered to be legally binding. The extent and magnitude of the rent, outgoings and licence variation (say, if some of the rent is deferred) must be carefully worded and refer to the lease. It is not certain an email or letter will be sufficient, or one day you may need a Tribunal or Court to provide a declaration if things go wrong. You want to avoid that!
Avoiding future problems now – Variations not prepared correctly may allow a party to avoid their obligations or may not be bind the parties if the premises is sold or repossessed by the bank. Omissions may mean the variation agreement might not bind all parties, or may just operate for the current lessee and not apply to a future any buyer of the business. The rent variation might be conditional upon customer numbers, sales turnover and government re-opening guidelines so on and should clearly worded. Extending a term of a lease which is registered will need a variation for registration on title or maybe a consent from a bank or other lender. Major lease variations may even amount to a surrender at law and it may be better to think about a whole new lease. There’s a lot to consider.
Bottom line. A properly considered lease variation document will protect the interests of both parties and hopefully avoid a dispute further down the road to recovery.
LEGAL UPDATE ON COVID-19 AFFECTED LEASES
On 28 April 2020, Justice Markovic of the Federal Court of Australia expressed the Court’s views on the Code, retail rents and COVID-19 in Strawbridge (Administrator), in the matter of CBCH Group Pty Limited (Administrators Appointed) (No3)  FCA 555.
In the context of an appointed administrator, this case gives valuable insights into how retail landlords and the Courts are responding the COVID-19 pandemic: At  of the Orders, the administrators are not “…personally liable for any liability for property leased, used or occupied, nor for the rent or other amounts payable pursuant to any of the leases…” At  the administrators are “…justified in causing the companies in the Colette Group not to meet their obligations to pay rent pursuant to any of the Leases which have accrued up until 5.00 pm on 6 May 2020”
At [8 -10] of the Reasons, the Court noted that COVID-19 Restrictions “…make it extremely difficult for the Administrators to operate the 93 retail stores which were the subject of the Leases as at 15 April 2020. By way of example Mr Marsden referred to the announcement made by the Prime Minister of Australia, the Honourable Scott Morrison MP, on 29 March 2020 in the following terms:
National Cabinet’s strong guidance to all Australians is to stay home unless for:
- shopping for what you need – food and necessary supplies;
- medical or health care needs, including compassionate requirements;
- exercise in compliance with the public gathering requirements;
- work and study if you can’t work or learn remotely.
9. The Administrators are of the view that it is necessary to keep the retail stores closed until the COVID-19 Restrictions are lifted as most people are not permitted to be outside other than to obtain essential goods and services and the type of products the Colette Group sells cannot be considered as essential goods or services.
10. The Administrators note that, based on the information provided to the public by the Australian Government and the Chief Medical Officer for the Australian Government, they cannot predict how long the COVID-19 pandemic and associated restrictions will persist or when the health threat will subside or be such that it does not impose a risk to both employees and customers.”
At [17–18] the Court noted “…on 7 April 2020 the “National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19” (Code of Conduct) was released. Mr Marsden notes that the Code of Conduct imposes good faith leasing principles for commercial tenancies where the tenant is an eligible business for the purpose of the JobKeeper program. Under the heading “Purpose” the Code of Conduct includes:
These principles will apply to negotiating amendments in good faith to existing leasing arrangements – to aid the management of cashflow for SME tenants and landlords on a proportionate basis – as a result of the impact and commercial disruption caused by the economic impacts of industry and government responses to the declared Coronavirus (“COVID-19”) pandemic.
This Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million (herein referred to as “SME tenants”).
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) and “…Mr Marsden gave evidence about the Administrator’s understanding of the Code of Conduct as at 15 April 2020 based on the announcements made.
At  the Court heard that “…total sales were approximately 14% of target for the full store network and (3), turnover was respectively 87% and 88% adverse compared to the same periods in the previous year and turnover in March 2020 was 36% adverse to sales in the previous month.”
At  the Court heard “…the Administrators’ position as at 15 April 2020 was the “mothballing” of the Colette Group business … is likely to continue for a period of at least two months;” and at , the Court noted, “It is unclear how long the COVID-19 Restrictions will continue. However, as the Administrators point out, the Code of Conduct is expressed to apply past the date on which such restrictions might end and for a “recovery period” thereafter. That being so, if the Code of Conduct applies to the Colette Group, it will most likely continue to apply after the stores are reopened so that any benefits obtained by the Colette Group pursuant to it will continue for the duration of the “mothballing” strategy.”
At  the Court confirmed “It remains the case that the Administrators are in a highly unusual and invidious position and that continuing to pay rent in the current climate would not be in line with the actions of other retailers and would deplete the Colette Group’s resources in a significant way. As frankly submitted by the Administrators, failure to pay rent is an unusual course for an administrator to take and jeopardises the Colette Group’s tenancies and potentially their ultimate ability to reopen the stores and sell the Colette Group business as a going concern. However, for the same reasons as I gave in CBCH (No 2) at - it is the preferable course, taking into the account the creditors’ interest as a whole in the maximisation of the value of the Colette Group’s business and the current commercial environment in which that business operates.”
So….is your retail business affected by the Coronavirus pandemic? Have your sales virtually vanished? Unable to make rent payments in accordance with your lease terms? We are a qualified entity under the Legal Profession Uniform Law (NSW) specialising in retail leases and disputes.
On 29 March 2020, the Prime Minister Scott Morrison said,
“Commercial tenants, landlords and financial institutions are encouraged to sit down together to find a way through to ensure that businesses can survive and be there on the other side.
This could include tenants and landlords being encouraged to come to agreement ‘on rent relief or temporary amendments to the lease’, reduction or waiver of rental payments, and giving tenants an ability to terminate leases on the grounds of financial distress”
Now the Code has force of law, lessees and lessors should act to assist each other. Both have certain rights and obligations under their lease. Each retailer is affected differently, whether it’s a chain of shops or a single independent. The bottom line is landlords, tenants and banks should try to negotiate a commercial outcome, even if the retailer cannot qualify for the JobKeeper programme. Need help?
Running out of cash? Banks are supporting the Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme with up to $40 billion of lending to SMEs (including sole traders and not-for-profits). Click third white “Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme” button below.
Need help? Use the free guides below (green buttons) or request an expert consult by calling, or sending a message via the form below. We conduct video conferencing, expert rent negotiations, mediations and turnaround advice to help you get through.
Some lessees have received breach of lease, termination notices and have been threatened with lock out. These lessees need urgent interlocutory orders from a Tribunal or Court to preserve their business. Contact us directly if this applies to you.
We know what landlords, leasing agents and their lawyers don’t want you to know!
Successful retailers know location & lease go hand-in-hand. Even without a pandemic, retail is fiercely competitive and requires broad ranging skills, experience and enormous effort, 7 days a week, highly seasonal and consumers are fickle and demanding – but the COVID-19 virus leasing decisions can make or break the business!
OUR SERVICES CAN HELP AUSSIE RETAILERS THROUGH TO RECOVERY
Click on a box below for more…:
TALK TO THE EXPERTS
Australian Retail Lease Management Pty. Limited is a qualified entity pursuant to the Legal Profession Uniform Law (NSW) specialising in retail and retail lease disputes. With over 33 years of retail and retail property, location and leasing experience, we have the resources and practical solutions to help your shops succeed in today’s competitive and ever-changing marketplace. High street, showrooming, pop up shops or shopping centres, we’ll help you get to “yes” so you’re in control. If occupancy costs are crippling your business, we have turnaround strategies to reduce costs, boost sales and protect your leases.
Our personalised approach, be it for individual shopkeepers, senior management or Board directors goes beyond property to ensure rightsizing and better portfolio management, so getting the retail right reduces your risk and helps to lock in profits for future growth.