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COVID-19 Commercial Tenancy Q&A

COVID-19 Commercial Tenancy Q&A

Presenters: Iain Rennie, Managing Director - Corporate and Commercial, Warwick La Hood, Director and Jane Wolfe, Associate Director

The National Cabinet has announced the underlying principles for a National mandatory Code of Conduct during COVID-19 (Code) for commercial, retail and industrial tenancies, but implementation of the Code relies on the States/Territories. Residential tenancies are not covered by the Code, and relief for residential landlords and tenants also depends on responses from the State/Territories.

What is the current position for landlords and tenants? What can we expect next? Our legal experts provide an analysis of the current state of play, latest developments and forecasts.

As mentioned in the webcast, you can find the latest update on NSW implementation here or view the NSW regulation here.

Webcast Transcript

Iain Rennie: Good afternoon and welcome. This is the Tenancy Relief Package webcast presented by Australian Business Lawyers & Advisors. I'm Iain Rennie and I'll moderate the session. With me in Sydney is my colleague, Warwick La Hood. Warwick is a director and head of our property team. And in Melbourne, Jane Wolfe. Jane is an associate director in the property team. Both Jane and Warwick have many years of experience in property law, they are experts in leasing, and they have followed the debate and evolution of the Relief Package.

Iain Rennie: What we'll try to get through today will be a history of the Relief Package and the role of the National Cabinet, what is the code and how is it implemented, a discussion of the key elements of the code, and then a discussion on the first legislative response of the first state in Australia to act on it: New South Wales. We'll then look at how certain other third parties play a role in the implementation of the code, and then we'll talk generally about how stakeholders should deal with problems coming under the code, or if in New South Wales, under the New South Wales regulation.

Iain Rennie: We'll start with an overview. As we all know, there's been a furious amount of activity to deal with the pandemic. We've had both job seekers, JobKeeper, and the relief package. Put in context, the relief package was announced first, but it took a while to come into play. In contrast, JobKeeper has vaulted over the top. It's been the subject of federal legislation and a long set of rules from the treasurer. But in the case of the Tenancy Relief Package, we've had not so much activity.

Iain Rennie: When the prime minister stood after National Cabinet on a Friday in early April, he released the National Cabinet Mandatory Code of Conduct. In that document it expressed its purpose as to set out good faith leasing principles and said that the spirit of all leasing arrangements should be determined pursuant to those principles. So if I may turn to Jane, after three weeks, does the expectations match the reality?

Jane Wolfe: In one word, no, not really. The national code that hasn't yet been implemented. It's left to the states and territories to implement it and with the exception of New South Wales, nobody has yet done so. So we're still acting on a set of principles and spirit of the code.

Iain Rennie: I remember that the prime minister also said that the code would in fact evidence a uniform national code. Are we going to get that, or what is going to roll out from here on? Do we know?

Jane Wolfe: We don't know. We can see what's happened in New South Wales. I suspect that what comes out of the other states and territories will look relatively similar but maybe very different. We just don't know until we see what comes out.

Iain Rennie: Let's have a look at the code itself and the National Cabinet. Jane, take us through this one.

Jane Wolfe: The National Cabinet is made up of the prime minister, the state and territory premiers and their chief ministers, and the chief health officers. And it was established to provide a general forum for national joint leadership, to cover everything to do with the pandemic.

Iain Rennie: So Jane, take us through the code, its history and some of its foundational elements.

Jane Wolfe: The code is a statement of principles. It's not law yet until it's enacted by the various states and territories. It's intended to create a national response that is consistent to commercial leasing issues during the COVID-19 pandemic.

Jane Wolfe: Basically it creates a set of good faith leasing principles for commercial tenancies, which includes retail, office, and industrial, and imposes those principles to the negotiation of amendments to existing lease arrangements between landlords and tenants. And as I said, it's a code not a law, so at the moment it's just principles to be acted on, apart from New South Wales where they have actually enacted a regulation covering some of the topics expressed in the code.

Iain Rennie: So the code becomes law when the states and territories individually respond to and adopt it.

Jane Wolfe: That's right. What the code itself says, there's nothing to stop landlords and tenants negotiating under the principles of the code before anything's legislated. But only in New South Wales have they actual legislation on it.

Iain Rennie: Let's go on.

Jane Wolfe: It has principles, things like landlords can't terminate your lease for non-payment of rent, they should waive other expenses and outgoings if possible, they should pass on concessions that they receive, say deferral of mortgage payments or land tax concessions.

Iain Rennie: So to whom does it apply? Does it apply to all commercial leases or not?

Jane Wolfe: No. It applies to tenants who have a turnover of less than 50 million for the 2018/19 financial year, and also are eligible for JobKeeper. And the eligibility for JobKeeper, very basic, is more than 30% reduction in turnover due to the COVID-19 pandemic.

Iain Rennie: So franchisees, group companies?

Jane Wolfe: Franchisees, the test is on the individual franchises and with group companies it is the group as a whole, so the revenue for the group as a whole.

Iain Rennie: What about residential? Where does that fit?

Jane Wolfe: Warwick, I might pass that one to you.

Warwick La Hood: Thanks Jane. Under the New South Wales situation, New South Wales has passed a regulation to govern residential tenancies during the pandemic. The code itself does not refer to residential. It isn't about residential. The code is about commercial tenancies. But New South Wales has passed a regulation for residential tenancies, primarily adopting the principles that are under the code. And there are 14 principles under the code. The main aspect about the residential tenancy regulation in New South Wales, which started on 15 April, is about restraining landlords from terminating a residential tenancy if they're an impacted tenant. And then the regulations define an impacted tenant in similar ways to the way the commercial tenancies are defined under the code.

Iain Rennie: So let's go back to the National Cabinet and its code, and its focus on commercial leases. We've moved on now to a side which, excuse me, identifies the fact that the code sees a role for third parties. And this is curious. So we have the code which is not law, but we also have a code which is calling for contributions from third parties. Talk us through this please.

Jane Wolfe: The code expresses an expectation that the banks, for example, will have a role to play in supporting landlords and tenants in reaching their agreements, so presumably to defer for example, with landlords.

Jane Wolfe: Otherwise there's not much in the code apart from that expectation on the banks, and there is not obligations, but a principle that landlords will pass on any concessions they receive to their tenants. And then we've heard different responses from the banks with their stimulus packages, government stimulus packages, the ACCC jumping in with their temporary authorization for retailers to collectively bargain. But none of it ties into the code and the New South Wales code, for example, makes no mention of the banks. So that principle of expectation on the banks to come to the party has sort of not really come to anything yet.

Iain Rennie: So an expectation, presumably, is not enforceable. This is again just the National Cabinet expressing a view.

Jane Wolfe: Yeah. Exactly.

Iain Rennie: And then with the big four banks, I think as far as we know, that's an individual response for me to the banks.

Warwick La Hood: Yes, that's right. It's an individual response. One can expect to think the big four banks would join in on the purposes of the code and have a good look at the principles of the code to see how they can make decisions to help landlords and tenants achieve variations to their leases in some way to adopt the code's principles. One would think that. Although, the bank stimulus packages came out before the code was announced. So whether or not they've had a look at the code since and tried to work around those principles, I don't know.

Iain Rennie: The thing that grabs my attention though is the ACCC and its interim authorization. That's effectively a permission for collective bargaining. So it'll be collective behaviour which would otherwise be prohibited.

Warwick La Hood: That's right. I mean, that's a positive for tenants, especially tenants in shopping centres.

Jane Wolfe: Yeah, certainly a positive for small tenants in shopping centres that would normally have very little bargaining power.

Iain Rennie: Warwick, over to you. Principles under the code.

Warwick La Hood: One of the critical aspects that tenants and landlords should be aware are what are the principles under the code. There are 14 of them. 14. And it's important to know what the principles are saying and how you interpret them. It's critical because of the way the principles have been adopted in New South Wales, and one can expect possibly other states to do a very similar thing in terms of adopting the principles under the code. There are 14 principles. One principle, which is a considerable one, is the landlords can't terminate leases due to non-payment of rent during the pandemic period.

Warwick La Hood: I had asked everyone to download a copy of the code. We give a link to that at the end of this webcast. But download and have a look at them. They're not that hard to understand and putting them in context for your particular situation, whether you're a landlord or a tenant.

Warwick La Hood: Some other parts of the principles are about rent reduction. Now, the manner in which the code sets down a principle to reduce rent is based on the proportional disruption to your trade. If you've had a disruption of 50% to your trade, then the principles say that your rent should reduce by 50%. Now, of that reduction the principles are saying half of it should go to deferral and half of it should go to waiver.

Warwick La Hood: We've had a lot of questions since the code's come down as to what's deferral, what's waiver. A waiver is where you don't have to pay the rent. An abatement. That's what a waiver is. A deferral is just that. That whatever amount is deferred is deferred to another day for that tenant to pay. Now, under the principles the idea is to defer it so you can pay it off for the balance of the lease term, or 24 months, whichever is the greater. And parties can agree otherwise depending on the financial circumstances of the landlord and the financial circumstances of the tenant. So that's the difference between deferral and waiver. It's a principle. Of course, parties can agree to something else.

Iain Rennie: What about for the landlord? Is there anything in the code which is landlord facing?

Warwick La Hood: Well the code is centred around tenant relief. The code does say though that parties must act in good faith. That's a principle.

Iain Rennie: We'll get onto that in a minute. But I'm curious to see whether the landlord actually has any specifics they can rely upon in the code.

Warwick La Hood: The landlord can rely upon if a tenant fails to abide by their obligations during the pandemic period. If a landlord and tenant have come to an agreement to deal with this pandemic and the tenant fails to abide by that, the tenant loses protections as the code allows them. If the code's adopted. The landlord also has other protections through third party relief, things like land tax, relief from banks and financial institutions. They're all principles under the code. So the landlord can turn to third parties to get some form of relief from their side.

Iain Rennie: So, can we just take a step back? There was general discussion amongst some states about state tax relief. Has there been any formal announcements on state tax relief at all?

Warwick La Hood: There's been no formal announcement on state tax relief. Although, one would expect that there will be and will be soon as to the exact amount of tax relief landlords will get, whether that's in the form of a waiver of land tax or a deferral of land tax.

Iain Rennie: I think I've heard rebates in New South Wales.

Warwick La Hood: Or rebates possibly given back to landlords who've already paid land tax. But at this stage we don't know the detail of what relief will be given to landlords, but we do know that we'd expect the state government to give some form of relief.

Warwick La Hood: Now, if a landlord does get that relief and under the lease the tenant pays the land tax of the landlord, they've got to pass that on. You'd expect that to be passed on to a tenant.

Iain Rennie: But it is curious, again, because we've got a national code which only grabs enforceability when it's adopted by the states, and we have states talking about ancillary benefits, but we actually haven't got anything of substance to rely upon.

Warwick La Hood: Other than New South Wales, we've got no substance. A discussion and looking at the code is just that, a code of conduct. And you heard before, it isn't binding on parties, it sets out a set of principles for parties to look at, to negotiate, to vary their leases. We've only got New South Wales who've adopted the code. And they haven't adopted it in full, but they have made reference to the principles.

Iain Rennie: So let's move on and have a look at two of the big issues coming out of the code: good faith, and that seems to be the very cornerstone of everything and then what happens when negotiations fail. So Warwick, good faith. What is it?

Warwick La Hood: Good faith. It's important, I feel, for tenants and landlords to understand what does good faith mean in negotiations. Because your used to negotiating a lease to see what is best for you as a landlord or as a tenant. When it comes to good faith, the principles require that parties must negotiate in good faith. What's the common purpose? You've got to sit there as a landlord and look at the tenant's financial situation. And as a tenant, you've got to look at the landlord's financial information and say, "Well, this landlord's under financial stress. What does it take for this landlord to get through this pandemic? What does it take this tenant to get through the pandemic?" Not what's best for me, but what's best for both of us. To address this common enemy, this pandemic.

Warwick La Hood: And that's what I'd like parties to consider: a common purpose to get through this pandemic. To be open about your financials. And to be truthful of course, but open.

Iain Rennie: Is there a definition to aid people at all?

Warwick La Hood: The courts over hundreds of years have discussed the concepts of good faith and I could take you through technicalities of how the courts see good faith. What I can say is that in this code the code's adopted principles, which start to define what good faith is and it's starting to narrow down your considerations and how open you must be with the other side. So I'd ask people to really-

Jane Wolfe: If I could just step in there. The definition that I read for good faith was broken into two parts and one was to act honestly and not arbitrarily, and the other was to act reasonably with regards to the interests of the other party without any obligation of you to subordinate your own interests. So it's about working out the best thing that suits everybody. It may not be exactly what you want, it may be not exactly what the landlord wants or the tenants wants, but you need to come to some mutually agreeable position.

Warwick La Hood: Yeah. That's right. I mean, you got to look at the other side, you got to look a the common purpose.

Jane Wolfe: It's all about achieving principles of the code.

Iain Rennie: If we go through ordinarily black and white law and where we're procedurally driven, how does somebody prove or establish they've acted with good faith? 

Warwick La Hood: Well that's a difficulty. I think you got to look at your 14 principles under the code and see if the other party has addressed those. If you get a party that just simply says no to everything and refuses to disclose financial or tell the other party how they're affected, that's not good faith. Good faith is being honest with each other about how the pandemic has affected your financial bottom line, and about your own hero.

Iain Rennie: Well, I find this really tough. I understand it's an expression of intent, but how do we organize people to do this? I suppose we've got the hallmark that they've got to be JobKeeper eligible. They need to have gathered as a tenant the information which will show financial affect from JobKeeper.
Warwick La Hood: That's right.

Iain Rennie: But is there any hints you can give as to how me, for example, as a tenant would approach negotiation with a landlord, and how would I start it off in good faith?

Warwick La Hood: Well there's always an opportunity for tenants to call upon their landlord and the agent to come to the table to renegotiate. Just to renegotiate a variation to your lease for a short period during the pandemic period. And it's just simply calling for the landlord. And we say later on what you should do now. Whether you're in New South Wales or any other state that hasn't regulated the code or part of the code, we talk about what you should do.

Iain Rennie: Okay. Let's move on. Jane, what happens if negotiations drag on or become frustrated? What does the code suggest we do?

Jane Wolfe: The code says that we go to the relevant state or territory dispute resolution process for retail and commercial lessors.

Iain Rennie: Yeah. And what does that mean?

Warwick La Hood: In New South Wales to start the mediation process, it's the small business commissioner. I expect that in other states as well.
Iain Rennie:
But again, I mean, if we go back to first principles, I think there's a call to go first to mediation. There's no one meaning of mediation. There's no universal set of rules, there's no determination as to the quality or experience of a mediator. So I take the code says you go to mediation by whatever rules. Then what happens?

Jane Wolfe: Well the code proposes mediation and dispute resolution under the states and territories, and one of the principles of the code is that parties shouldn't use that process to delay or frustrate amicable resolutions that they can come to themselves.

Jane Wolfe: The New South Wales sets it out what you do and how it works. But everywhere else, again, it's just a principle of mediation under usually the office of small business.

Iain Rennie: But again, I'm trying to tease this out. I mean, if you have a six month or a nine month period that is facing us now, you commence your negotiations, it becomes frustrated, you go to mediation. And mediation, by definition, is an attempt by a third party to bring you to agreement. But what happens if you don't come to agreement? What happens after that? And all the time your six or nine months is ticking down during this period. Where do you go after that?

Jane Wolfe: If you don't come to agreement you would go to the NCAT in New South Wales, VCAT in Victoria, other relevant bodies in other states. But your right, there are no time limits.

Iain Rennie: And are there any penalties for somebody frustrating the process? Is there a financial penalty for example?

Warwick La Hood: No, there's no financial penalty. What there is though is, when we move to the New South Wales regulations, is a restraint on the landlords if they haven't followed this good faith mediation process.

Iain Rennie: We'll come to that, because that's the New South Wales response and that's an important one.

Warwick La Hood: Oh, that's the response on the code too.

Iain Rennie: All right, let's move on. So with great surprise, New South Wales released its regulation last Friday. It's fair to say that if we presented to you the slides that were available last Friday, they'd be quite different. We didn't have one response from the state or territory, but we now do. So Jane, take us through the New South Wales response.

Jane Wolfe: The New South Wales response is done by an amendment to the Retail Leases Act and the Conveyancing Act so that it covers retial leases and pretty much all commercial and industrial leases. It runs for a period of six months from the 24th of April, so until the 24th of October, which is when it is repealed. And it works through concepts of impacted lessee, which fits in with the principle of the code, which was the turnover of less than 50 million and eligible for JobKeeper, and it acts to prohibit and regulate the exercise of landlords' rights relating to the enforcement of leases during that six month period.

Iain Rennie: So unlike the code, is the regulation enforceable?

Jane Wolfe: Yes. It's enforceable in that landlords can't take certain prescribed actions under the lease until they go through the process set out in the regulation, which follows the principles of the code. Not all of the principles of the code are included and not all leases are included. So, for example, a lease entered into after 24 April, unless it's an option to renew, won't be covered. And it also doesn't cover leases under the Agricultural Tenancies Act.

Iain Rennie: Residential again, I presume, is excluded from this package?

Warwick La Hood: Yes. The residential's already taken care of. So they've enacted legislation for residential, but this now covers commercial leases right from retail, industrial, and commercial if they fall under the definitions of the regulation.

Jane Wolfe: Yeah. And it requires landlords and tenants to renegotiate the rent and other terms of their lease in good faith and following the principles of the code.

Iain Rennie: There's an issue that arose amongst us over the weekend, which was whether the New South Wales regulation has retrospective effect or not.

Warwick La Hood: Yes. This is a bit tricky, but the regulation commenced last Friday. It goes for six months. It applies to impacted tenants. Now, impacted tenants as per the code where the turnover is less than 50 million and you qualify for the JobKeeper scheme. So if you're an impacted lessee, these regulations will apply to the lease. Now, the prescribed period, which you've said before, is six months after the regulations commenced. So in a sense there is retrospective application to the extent that you fall under the JobKeeper program.

Jane Wolfe: And also, because the regulations, they act to prevent a landlord from taking action, but also from continuing any action. So, for example, if a landlord had started an action prior to the 24th of April.

Iain Rennie: So let's have a look at that. I think that's the prescribed actions. Warwick?

Warwick La Hood: Under the regulation there are certain actions that are called prescribed actions that cannot be taken by a landlord unless good faith negotiations have been exhausted as required by the regulation. Now, here are some prescribed actions on the screen now. Have a look at them. They will generally apply to most tenancies.

Warwick La Hood: A landlord can't do any of those things during the pandemic period. They can do those things if they followed the dispute resolution procedure under the regulation, which requires the good faith negotiations.

Jane Wolfe: Can I just jump in there? Those prescribed actions can't be taken in certain circumstances. So it's not in all circumstances, it's just a breach or failure to pay rent, a breach or failure to pay outgoings, or the business operating under the lease not being open for the hours that it's supposed to be open under the lease.

Iain Rennie: But nonetheless, that's quite a list of prohibitions.

Warwick La Hood: Oh, there are. There are if you read the regulation. And we ask people to read the regulation as well, to look at the type of things that can't be done during the prescribed period.

Iain Rennie: So again, it's not the case that they can't be done at all, it's that they cannot be done unless you have followed the procedure under the regulation.

Warwick La Hood: That's right. There's a procedure. And that starts with the call for renegotiations by one party on the other. So there must be a call for negotiations.

Jane Wolfe: That's right. So the obligation is on landlords really to comply with the requirement to renegotiate before they can take any prescribed action.

Iain Rennie: Then let's look at the very last point on that slide, existing enforcement actions. So if we have a lease which is caught, we have a dispute between landlord and tenant and there's some form of enforcement action perhaps commenced a month ago, two months ago, what does the New South Wales regulation do to that?

Warwick La Hood: The regulation seems to apply to existing enforcement actions, because under the regulation it talks about continuing to take enforcement action. So a landlord can't continue to take that action unless it goes through that dispute resolution procedures that the regulations impose on everyone. So currently, if you do have a dispute, you should be calling for those negotiations to take place.

Iain Rennie: So until such time as the negotiations have run their course and maybe dispute resolution, the landlord cannot pursue or continue an existing action.

Warwick La Hood: That's right. And mediation is not the mediation you may have already tried with the landlord. Now it's mediation to take into account the COVID-19 principles in the code. So they now must be considered as part of a mediation.

Iain Rennie: Let's have a look at the next slide. Again, this is from a different perspective. The prior slide was really looking at prohibitions on landlords, what they can do. But here we have relief against forfeiture, a tenant's right. How does that fit into the regulation?

Warwick La Hood: Thanks, Iain. This is an existing right of a tenant to seek relief against forfeiture or attempts to forfeit a lease by a landlord. Tenants already have this right. It primarily sits under section 129 of the Conveyancing Act. So a tenant has the right to approach the court to seek relief, even if they've breached the lease. The regulations that have been put in place for New South Wales actually empowers section 129 and says that if there are current actions in place, that the court can take into account the leasing principles under the code, the effects of the pandemic if granting relief.

Warwick La Hood: So that action's in place. That right's in place. It's been enhanced by the regulations by telling the court that you must take into account the code, the leasing principles under the code.

Iain Rennie: So if we just go back to the previous slide, that's quite a stark contrast. So the prescribed actions are effectively prohibitions on landlords and what the can do without having first complied with the code. And then we have, by virtue of its drafting, the New South Wales regulation retains and entrenches the right against forfeiture.

Warwick La Hood: That's right. And now adds that consideration for the court to consider.

Iain Rennie: Consider the pandemic response regulation.

Warwick La Hood: Yeah, whether to give a tenant relief against a forfeiture of the lease. So that's important to understand. Hopefully though the parties, both parties, will see that negotiations in good faith will come to a reasonable solution during the pandemic period to vary the lease.

Iain Rennie: So where we're coming to is a point where we have the national response, being the code, being largely just a statement of principles and really not enforceable, with one exception being New South Wales, which has now adopted its own very specific regulation and created a series of prohibitions and entrenchments. It's a very strange position for the nation to be in.

Warwick La Hood: It is, Iain. One thing that we're getting a lot of questions on is can I demand rent relief, et cetera? Just on a general basis, the code has principles that says that a tenant will be given rent relief by looking at the proportional disruption of your trade. That hasn't been regulated. That's not a regulation.

Warwick La Hood: So it hasn't been adopted. That principle has not been adopted by the New South Wales government. So you can't force a landlord to reduce your rent. What you can say is that parties have got to negotiate based on the principles. So it's only a principle. It's only a principle.

Iain Rennie: Okay, let's move on. So, this slide's supposed to be addressing the strange situation we're in. If you're outside of New South Wales, what do you do?

Warwick La Hood: Well, whether you're outside or inside New South Wales at the moment, one thing you should be looking at in terms of landlord and tenant is start preparing your financials. You're probably sitting out there thinking, "What's happened? We thought the code was in place." I've received many calls about people not paying rent because they thought the code was law. And then when you try and explain no, the code wasn't law a week ago, the tenant realizes they've breached their lease.

Warwick La Hood: The code is regulated in New South Wales only. It doesn't matter that it's only been regulated in New South Wales. What tenants and landlords should be doing is getting some legal and accounting advice on the application of the code in their state, and looking at the regulations in New South Wales and how that mixes together to give parties rights and obligations. What does good faith mean? They should also be getting some accounting advice and financial advice on how this pandemic's affected them.

Warwick La Hood: Now, there'll be some businesses where it's clearly 100%. The government's given a directive, close down. That's 100%. That's pretty obvious. But there are some cases where it isn't so obvious. I had one office ring me up and say, "We don't need the space anymore, because we can work from home. Therefore, we're going to rely on the code." Their income didn't change. It went up. That doesn't apply to them. In terms of accounting advice it's not that easy. Even restaurants are still doing takeaways. You got to look at that proportionality principle. Start gathering your financial information to show the other party how you've been affected by this pandemic. Start thinking with your advisors. What is an affordable solution.

Iain Rennie: Affordable to whom?

Warwick La Hood: Affordable to both landlord and tenant. Some landlords will be under stress through mortgages. They may have mortgaged across their portfolio and they might be limited as to how much they can give. Those landlords should be looking at what relief they can get beyond from the tenant. Look at what government's going to give them, see what's affordable for the landlord during the pandemic period. It's creating affordable certainty for the parties. And tenants likewise. They need to work out what can we afford. Have a look your landlord and if your landlord's heavily geared, try and work out an affordable solution that suits both parties. OH, finally, sorry Iain, finally you call for negotiations. Because the regulation makes it very clear, you got to call for negotiations.

Iain Rennie: Procedure is your friend.

Iain Rennie: But I just want to, and Jane, maybe I'll ask you this, but we seem to be in the situation that we don't have a uniform national response. We have a code which is expressed as a guideline, I presume, at its strongest. It expressly excludes residential, it excludes a whole lot of commercial leases where one party is just too large and they just have to look after themselves, and then we have, as a specific example, New South Wales at the moment which has more or less adopted but varied, or applied in its own context, the code by creating an enforceable regulation. Is that where we're at now?

Jane Wolfe: That's pretty much exactly where we're at. So the code is what it is, which is a statement of principles. It does expect the larger landlords and tenants who don't necessarily fit under the code to also follow the spirit of the code in their negotiations. But again, that's just expressed as an expectation.

Jane Wolfe: So I think in New South Wales they've got something. Everywhere else there's nothing yet except the principles. But I would say that landlords, and tenants really, get ready. The same as Warwick has just said, they should get ready in New South Wales, getting their financials together and instigating conversations with each other, understanding what each other need and want. 

Warwick La Hood: I think we can expect the other states to follow fairly soon.Now that New South Wales has passed this regulation, one would expect the other states to pretty much follow that. Well, you'd hope they would to create some certainty across the nation. But even as we said, even though the regulation's passed, it doesn't fully adopt the code. Not fully. It puts restraints on landlords, it puts restraints on tenants, but understanding the principles of the code is very important. Because I think every state will require good faith negotiations, taking into account the principles of the code. So it's important to understand that and get legal advice on that.

Jane Wolfe:
They will follow. Certain things for everybody will be the same, I imagine. Such as the threshold tests. Of whether you're an eligible tenant. But what the other states and territories will look... I think it's going to look similar to New South Wales and they may add in some more stuff.

Iain Rennie: Yeah. And do you think the enforcement part works in New South Wales?

Warwick La Hood: The enforcement is merely, from what we can see, a restraint.

Jane Wolfe: It's not really enforcement.

Warwick La Hood: Yes. It's just restraining the landlord. Where there's a lot of uncertainty. It only came in last Friday. There's still a little bit of uncertainty on how the regulation operates. If the parties can't come to an agreement, what happens there?

Iain Rennie: I'm just trying to pick up and trying to get some certainty. If I'm a tenant and I take your advice and I approach my landlord and I either get no response or I get involved in a very turgid series of engagements and three months down the way I'm no further along, what do I do? How do I get my position clarified and things resolved?

Warwick La Hood: Well, this is one of the problems. Certainly in that situation a landlord couldn't take enforcement action. Or, if a tenant's not prepared to negotiate, what does the landlord do? The tenant may not get the protections under the regulation if they don't turn up and at least try and negotiate.

Jane Wolfe: Well that's right, because refusing to negotiate isn't good faith.

Warwick La Hood: That's right. Refusing to negotiate is not good faith. Almost bad faith.

Jane Wolfe: But I think the issue is that there is no enforcement. There's a restraint, so they can't evict, a landlord can't evict a tenant, but as to what happens afterwards... What happens if the pandemic comes to an end and I haven't been evicted but I owe however many months' rent?

Iain Rennie: Is it possible for people to go around the code? For example, they enter into good faith negotiations and they deal with matters which are just outside of the principles of the code, is that okay?

Warwick La Hood: Yes. Yes. In fact, that's something that Jane and I have tried to get people to do, encourage people, is to look at what you can afford, identify a solution, and if the tenant and the landlord can come to an agreement on that solution, whether it's within or outside the code, it's affordable for both parties, put it in place. It gives you affordable certainty.

Jane Wolfe: They can also agree, for example, that the landlord can take some prescribed actions. They can agree to terminate the lease between them. So there's nothing stopping anyone from coming to their own solution outside the code.

Iain Rennie: There's a series of things we should get teased out in the Q&A's. So these questions came to us over the last few days, questions are coming in now, so we'll get through as many as we can.

Iain Rennie: If my lease is expiring and I'm offered a new lease, is that new lease covered by the New South Wales regulation?

Warwick La Hood: Yes. Iain, I saw a lot of those questions come through. The regulation applies to existing leases up to the date it commenced, last Friday. It doesn't apply to new leases that are entered into after Friday. However, it still applies if you renew your option to an existing lease that existed before last Friday, or if you're looking to extend the existing lease.

Warwick La Hood: I've heard of one circumstance where the landlord offered the existing tenant a whole new lease. Rather extend the existing, they offered a new lease. Now, that could be considered, could be considered, a new lease that may not fall under the regulation. Because it's new as opposed to extending an existing lease or renewing an existing lease.

Warwick La Hood: So just be aware that leases entered into after last Friday do not fall under this code or the regulation. They're not protected. Only ones that existed last Friday, or existing ones that were extended or renewed.

Jane Wolfe: Yeah, I think in that circumstance you would be advised to make a variation to your existing lease, not to enter into a new lease.

Warwick La Hood: That's for a tenant anyway.

Iain Rennie: So Jane, one for you. Are licenses considered leases under the New South Wales regulation?

Jane Wolfe:
There's no mention of licenses. However, I suspect that the answer to that is yes. Licenses will be covered and probably under the Conveyancing Act.

Warwick La Hood: Yeah, I somewhat agree. And/or the retail leases. Look, licenses are normally short term agreements to occupy space. They are most likely covered. Whether a short term agreement is naturally extended by the regulations, I don't think they are. If you've got a short term lease in place that only goes for the next few months, I don't believe the regulations will increase that tenure of the lease.

Iain Rennie: So on the same thing, what if we have this conversation in two months' time and a lease has expired? So it was there at the relevant time, but it's expired. Does the New South Wales regulation, or in fact the code, deal with an expired lease?

Warwick La Hood: It certainly does. It's still covered by the code, but whether it enables or restrains a landlord from terminating the lease on a month to month notice, which a landlord can do normally in an expired lease, I don't believe the regulations will restrain the landlord from terminating a month to month lease.

Jane Wolfe: Another issue with an expired lease, is that if you have come to an arrangement with the landlord as a tenant to defer your rent, what happens to that deferred rent? Because normally it would be repaid over a period of time following lease expiry. If your lease expires in the middle of the pandemic, where does the deferred rent go?

Warwick La Hood: Yeah. Jane, that's a good point. The code sets down a principle on how deferred rent is going to be paid. That hasn't been regulated. So you can't enforce that against the landlord, or you can't enforce it against the tenant. So when it comes to deferral of rent, that's a matter of negotiations. The code sets down the principle, that it's to be paid over the balance of the term of the lease or 24 months.

Jane Wolfe: That's right. So in the case of an expired lease, you would need to come to some separate arrangement, particularly if you're a landlord, to cover how that deferred rent is going to be repaid to you later on.

Iain Rennie: Okay. Jane, I've got a couple of questions which I'll try and put together. They're all about the upfront negotiation. Is there any prescription or guidance as to an entitlement to a deduction? Sorry, to a reduction. For example, people have asked whether they're entitled to a 50% or a 30% depending upon their financial circumstances at the moment. So do we have any guidance under the regulation or the code as to where you may put yourself along a spectrum?

Jane Wolfe: There is some guidance under the code and it's all about proportionality, so proportionate to your reduction in turnover. The regulation doesn't appear to say anything about it at all.

Warwick La Hood: Yeah, so it doesn't adopt the principle. So it becomes a principle. So it's the code that's a leasing principle to take into account when you're entering good faith negotiations. It isn't something that you can force a landlord to give you a rent reduction, it's a principle.

Iain Rennie: So there's no formula.

Warwick La Hood: No. Mind you, if a party simply denies a rent reduction for no good reason, then that might not be seen as good faith, noting that it is a principle in the code.

Jane Wolfe: Yeah. I think they put a formula of sorts which says up to 100%, but it's proportionate.

Iain Rennie: Warwick, two questions I'll try and put together. I'll the first one. I've asked my landlord for some sort of discount on my rental lease, but he is not agreeable to this. Is there anything that can help tenants get some form of discount? This is a childcare centre, and so it's a commercial lease. So I would interpret that as perhaps a good faith issue.

Iain Rennie: And then here's the second question: what to do if the property manager and landlord are playing hardball and not willing to start a dialogue and communicate?

Warwick La Hood:
Yes, this is where I certainly take the view that if an agent or landlord are playing hardball, which you'd expect in commercial negotiations and things like that, these are not commercial negotiations, these are good faith negotiations. And if the landlord or the agent are simply denying any rent reduction for no reason whatsoever, they're not following the principles of the code. That's not following the principles of the code. That to me is not good faith negotiations. If that's right, which I think it would be, if that's not good faith negotiations, they therefore cannot take on a prescribed action. In New South Wales. Well, we don't know the other states yet, but you hopefully expect the other states to follow that concept.

Iain Rennie: Jane, for you. Is there a timeframe mandated or proposed for negotiations?

Jane Wolfe: No. There isn't. So you can negotiate for as long as you like, I assume, and then if negotiations fail, go to mediation and through the dispute resolution process. So no time frame.

Warwick La Hood: Jane, do you think if a landlord calls for a tenant to renegotiate, or the other way around, and the other party doesn't respond for months, that's not good faith?

Jane Wolfe: Yeah, I agree. Refusing to negotiate is not good faith.

Iain Rennie: Question for Warwick. What is reasonable for commercial tenants to request from their landlords, and what alternatives do they have if the landlord is not agreeable to it? Now, can I just rephrase that from one perspective?

Warwick La Hood: Yes.

Iain Rennie: Which is, is it by definition bad faith if your landlord does not agree with your proposed rent reduction?

Warwick La Hood: I wouldn't say it's necessarily bad faith. It doesn't follow. Because the landlord might be in a position they can't offer a rent reduction. But the landlord's got to give that information to the tenant, as does the tenant need to give it to the landlord. So what is good faith is giving each other a complete open view of each other's financials and how this pandemic's affected each other, and then trying to come to a common purpose to see if a solution can be determined or resolved. That's good faith negotiations.

Iain Rennie: This is the affordable solution.

Warwick La Hood: The affordable solution for both parties. The affordable solution. Affordable certainty.

Iain Rennie: Jane, for you. Can commercial agreements between landlords and tenants be agreed upon other than those outlined in the code? I think you've touched on that. What powers does a landlord have if a tenant does not abide by the new agreement made?

Jane Wolfe: The principles of the code say that a tenant must abide by any agreed amendments to the lease. So if you're a tenant you need to comply with the lease as amended by agreement between you. And if you don't, you'll lose protection of the code, if you're following the code, and you'll protection generally.

Warwick La Hood: And that's one reason why tenants and landlords should get that legal, accounting, and financial advice to make sure when they're negotiating that they can negotiate on terms that's going to see them through the pandemic and not halfway through.

Jane Wolfe: And also, if they find themselves in a position where they're thinking, "I can't comply with this," they need to go back to the landlord straight away and start a new dialogue.

Iain Rennie: So how does it work with the varied lease and the prescribed actions?

Warwick La Hood: Yes. Well, everyone should have a lease agreement and it should be in writing. And all lease agreements more than three years in New South Wales must be registered. And the way, technically, that's going to be managed, parties will get together, hopefully come to a solution to vary the lease. That variation must be in writing. It must be documented in writing. Don't leave it to oral discussions, because oral discussions can be interpreted. Put it in writing and make sure that writing is certain. It can't be misinterpreted. By way of a deed.

Iain Rennie: If you've resolved matters between landlord and tenant and they're dealing with some matters which are outside of the code, for example, and then subsequent to that the tenant breaches those provisions, in New South Wales, does the landlord have to be aware of the prescribed actions, or is this outside of that?

Warwick La Hood: No, they still need to be aware of the prescribed actions. So if you've come to an agreement between you, you're still an impacted lessee for the purposes of the regulations, well you'll always be an impacted lessee. You might need to go back through the good faith.

Jane Wolfe: You may. The principles of the code do say that if a tenant reaches agreement with its landlord and then breaches lease they may lose the protections.

Warwick La Hood: Yeah, that's a principle.

Jane Wolfe: That's why I'm saying you need to go to your landlord if you're facing difficulty under the newly agreed arrangement.

Iain Rennie: Okay. There's a series of questions which are quite similar and some of them are asking questions, for example, that my landlord is the trustee of a super fund, or is in fact a large super fund, or is a foreign national. Does the nature of the landlord change the application of the code or the New South Wales regulation?

Warwick La Hood: I don't think it does. I don't think it does. It's all about what is an impacted lessee. That's what it's about. It's about what's an impacted lessee and the definitions around that. Although I must say, a super fund landlord has got other restraints on them to other legislation. And that's the subject of getting some pretty good accounting and tax advice as to what you can do as a super fund owner of land, of commercial land, in terms of a variation.

Iain Rennie: My tenant has now moved out leaving 20 months still on the lease, because they say they cannot recover from a business perspective. I rely on the rent to pay my mortgage, which is accruing at a particular amount. What should I do? So we've got what appears to be an abandoned lease. What are the rights of the landlord in those circumstances?

Warwick La Hood: Look, that's a very case specific type question which needs an analysis of why the tenant abandoned the premises. Has the lease been terminated? Was the reason nothing to do with the pandemic? Was the tenant's business already not paying rent? Were they under default before the pandemic?

Jane Wolfe: Yeah. I think that's what it will come down to. Have they abandoned the premises because of COVID-19? And if they have, then they're probably going to fall within the principles of the code.

Warwick La Hood: Don't forget, this code and the regulation is about varying existing leases into the future, not about ones that'd been already terminated.

Iain Rennie: So if we just go back to first principles, the abandoned lease still would have a contract underlying it. And in ordinary circumstances you would say that the landlord would consider whether they would sue on the contract for the rent that's foregone.

Warwick La Hood: That's right.

Iain Rennie: But your answer seems to be, depending upon the nature of the tenant and whether they are appropriately an impacted lessee, certainly in New South Wales, then the prescribed actions regime would apply I'd imagine.

Warwick La Hood: That's right. You've got to be an impacted lessee. The pandemic must've caused the problems the lessee faced. And if it didn't, then they don't come under the regulations.

Iain Rennie: So final question, we're running out of time. Does it make a difference for negotiation purposes if, for example, you had neighbouring tenancies? One was a business which was effectively closed down for six months because of the pandemic, and the neighbouring which just decided that it wouldn't trade for the duration of the pandemic. How would a landlord deal with each of those? Identically? Differently?

Warwick La Hood: Well once again, the law applies equally to both situations. Certainly the tenancy that had to close down because of the pandemic would be considered an impacted lessee and there'd be requirements to negotiate in good faith in regards to variation. As to the other tenant who may not have been impacted by the pandemic, they just decided to close down, well they've got to prove they're impacted by the pandemic, and they've got to show the landlord that's the case and they've got to do that in good faith. You can't just say that. You've got to be able to prove it.

Warwick La Hood: Because the landlord can say to a tenant, "You know, you've been breaching this for the last few years. Your using this as an excuse to get out of a lease." And if the landlord can show that, well the tenant might not be an impacted lessee. But it's a case by case situation.

Jane Wolfe: That's what it comes down to. Is that tenant an impacted lessee? And I suspect that'll be the same across the nation.

Warwick La Hood: I expect a lot of arguments around that, because I do hear from landlords that some tenants have been breaching for years and they're just using this as an excuse to get out of a lease, which I don't think will be accepted. You have to be an impacted lessee. The pandemic must've affected you.

Iain Rennie: So your advice in those circumstances to the landlord would be, whether it's a bad tenant being opportunistic, nonetheless, look to the code outside of New South Wales, look to the regulation in New South Wales.

Warwick La Hood: Go through the machinations of negotiations in good faith. In good faith. And then see if you can come to a solution.

Iain Rennie: Ladies and gentlemen, we've just run a little bit over time. Thank you very much for your time. We have some resources available. So if you look on that screen you'll see there's a resources hub that our law firm has and there's lots and lots of articles in and around the pandemic, property and otherwise. At the bottom there's a click-through, so if you follow that, that will take you straight to the New South Wales regulation and we recommend wholeheartedly that you read that. For more information you can see a contact website for ABLA.

Iain Rennie: There will be emailed out to you an article on the New South Wales regulation. That will come out today we think, or if not, it'll be tomorrow morning. And we'd be interested in your comments. If there's anything more we can do for you, we'd be delighted. Thank you very much for your time.

Warwick La Hood: Thank you.
 

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