The economic impact of COVID-19 on business generally, and commercial leasing arrangements has been the focus of many landlords, tenants and governments.

On 7 April 2020, the Federal Government released its much-anticipated Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (Code).

The Code adopts and builds on principles emanating from National Cabinet Meeting discussions concerning commercial tenancies and is to be implemented by states and territories through legislation or regulation. It imposes a set of leasing principles to apply to commercial tenancies (retail, office and industrial) between owners / operators / other landlords and tenants, in circumstances where the tenant is an eligible business – a small-medium sized business (with annual turnover of up to $50 million) that, due to financial stress as a result of the COVID-19 pandemic is eligible for the Commonwealth Government’s JobKeeper programme.

For a franchise, the $50 million threshold applies at the franchisee level, and for retail corporate groups, the threshold applies at the group level.

The Code is intended to apply for the period during which the Commonwealth JobKeeper program remains operational.

What are the objectives of the Code?

The Code’s purpose is ‘to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period whilst seeking to appropriately balance the interests of tenants and landlords.’

The mutual benefit of landlords and tenants implementing measures to foster business continuity is acknowledged, and it is anticipated they will negotiate transparently and in good faith to reach tailored solutions.

Agreed outcomes should consider the financial impact of the COVID-19 pandemic on the tenant (its revenue, expenses and profitability) with appropriate arrangements having regard to the present impact and a reasonable recovery period.

Effectively, the Code enables eligible commercial tenants to receive rent relief in the form of waivers or deferrals (proportionate to trading reduction of their business) to help them survive the pandemic and beyond. The Rent Relief Policy requires eligible tenants to continue to engage their employees through the JobKeeper program and uphold the substantive terms of their leases.

What are the Leasing Principles?

The Code’s Leasing Principles should be applied, on a case-by-case basis, when negotiating temporary arrangements. Key principles include:

• Landlords are prohibited from terminating leases for non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
• Subject to negotiated amendments, tenants must otherwise commit to and fulfill the substantive terms of the lease. Failure to do so will forfeit protection under the Code.
• Landlords must offer proportionate rent reductions in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, based on the reduction in tenant’s trade during the COVID-19 pandemic period and subsequent reasonable recovery period.
• A rental waiver must be no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period, or greater in cases where the tenant’s capacity to fulfill their obligations under the lease would otherwise be compromised. The landlord’s financial ability to provide such additional waivers must be taken into consideration.
• Unless otherwise agreed, payment of deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater.
• Landlords may not apply fees, interest or other charges with respect to rent waivers and deferrals.
• Reductions in statutory charges (land tax, council rates) or insurance should be passed onto tenants reflective of how these are proportioned in the lease.
• Landlords are prohibited from calling in a bank guarantee, personal guarantee or security deposit for non-payment of rent during the COVID-19 pandemic period and/or a reasonable subsequent recovery period.
• Apart for retail leases based on turnover rent, rental increases are to be frozen for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.
• Tenants should be provided an opportunity to extend a lease for the equivalent period of a rent waiver and/or deferral period.
• Where agreement cannot be reached, matters should be referred, and subject to, relevant state and territory resolution processes.

What should tenants and landlords do?

Tenants and landlords are commercially reliant on each other and should negotiate in good faith to reach practical solutions that will sustain both, not only during the pandemic, but into the future. Many negotiations will be challenging and complex.

Negotiations should consider:

• the Mandatory Code of Conduct and relevant state / territory legislation and regulations;
• the terms of the current leasing arrangements, including headlease / sublease arrangements which will add complexity to the negotiations;
• Government financial assistance such as Commonwealth Government JobKeeper assistance for eligible tenants;
• any loan repayment holidays provided by lending institutions to the landlord;
• the documentation required to show actual losses / decreases in turnover suffered by a tenant due to COVID-19 (bank statements, accounting records);
• realistic timeframes for recovery with possible extensions to moratorium periods;
• any variations / extensions to the term of the lease.

The Western Australian Government has indicated that landlords should not be asking tenants to provide evidence of existing savings to prove financial hardship. This may be an indication that the test will relate to changes to a tenant’s financial situation resulting from COVID-19. The position in Western Australia is expected to become clearer as emergency legislation is introduced.
Negotiations can be facilitated with the assistance of a commercial lawyer and agreed variations documented in writing and, where relevant, registered on the title of the leased premises.

Conclusion

As the present crisis continues to evolve, so too do the measures to address the numerous economic challenges faced. It is yet to be seen how the states and territories
will incorporate the Code into their various laws and regulations.

In preparation for the implementation of these measures, New South Wales has enacted the COVID-10 Legislation Amendment (Emergency Measures) Act 2020 (NSW) to allow regulations to be made under key Acts such as the Retail Leases Act 1994 (NSW). It is likely that other states and territories have already or will introduce similar laws.

We are here to assist throughout these difficult times and encourage tenants and landlords financially impacted by the coronavirus to contact us for independent tailored
advice and assistance.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

This material incorporates information based on our understanding of proposed or pending measures to address the impacts of Coronavirus (COVID-19) and may continue to change as developments unfold.

 

 

A franchise operates within an existing business structure that gives the franchisor discretion to implement strategies, introduce new products and set prices for the ‘branded’ goods or services. These commercial decisions however must be exercised in ‘good faith and reasonableness’. 

The obligation of good faith is reflected in the Franchising Code of Conduct which sets out mandatory processes for buying and selling a franchise, and regulates the conduct of franchisors and franchisees.

The obligation of good faith was considered at length in Virk Pty Ltd (in liquidation) v Yum! Restaurants Australia Pty Ltd [2017] FCAFC 190.

The case concerned an appeal from an earlier decision where Pizza Hut franchisees claimed that, by introducing its ‘Value Strategy’, franchisor Yum! breached terms of its franchise contract, engaged in unconscionable conduct and was accordingly liable in negligence. The strategy required franchisees to slash pizza prices and reduced the pizza range from four to two categories, resulting in financial loss for many franchisees.

The original case and appeal were unsuccessful, with both considering the scope of the duty of good faith and whether that duty requires a franchisor to act reasonably.

Parties to a franchise arrangement must act in good faith within the meaning of the unwritten law as determined in various cases. Essentially, good faith requires parties to act reasonably, honestly and not arbitrarily, with a common goal of achieving the purposes of the agreement. 

Franchisees however must be aware that franchisors will usually have discretion to change branding, introduce or delete products, or change policies and processes. Whilst this discretion is not unfettered, it may, as in the above case, impact upon the financial viability of the franchisee’s business. In this respect, franchise agreements often contain terms protecting the franchisor from claims if the business or proposed location of the business is unsuitable, or the franchise unprofitable. 

Franchisees should give careful consideration to the constraints of a franchise system and the potential need to adapt to changes imposed by the franchisor, before committing to an agreement.

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances. 

Management of employees is an important aspect of running a business.     

Employees that are motivated are more likely to deliver higher levels of performance, work more productively and have less sick leave from work. Rewarding and recognising good employee performance is just as important as managing employee performance.

There may be times when an employee’s performance is unsatisfactory. It is important that the employer addresses the issue as soon as possible with the employee. There are a number of steps that may assist employers to manage poorly performing employees.

An employee’s poor performance may arise through:

• breach of the employer’s workplace policies;
• a failure to perform the duties of the employee’s position or to perform them to the standard required by the employer;
• disruptive behaviour that affects co-employees; or
• unacceptable behaviour in the workplace.

It is important to note that poor performance is not the same as misconduct. Misconduct is very serious behaviour such as theft or assault which may justify immediate dismissal. In cases of misconduct employers should seek legal advice about how to proceed prior to taking any action.

An employer should consider following these 5 steps in managing poor employee performance:

1. Act Without Delay – Deal with the employee’s poor performance without delay;
2. Private Discussion – Discuss the poor performance with the employee in a private meeting. Clearly tell the employee how their performance falls short of the standard required by the employee.
3. Allow Employee to Respond – Give the employee an opportunity to respond to the poor performance. The employee may be experiencing personal issues which have adversely affected the employee’s performance.
4. Resolution – Agree with the employee on a resolution to the poor performance issue. The resolution should be in writing and signed by the employer and employee.

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances. 

All jurisdictions in Australia provide statutory rights for eligible persons to contest an unfair Will if they can show that they have been left without adequate provision by the testator.

In Western Australia, an eligible person includes a spouse or de facto partner.

If a family provision claim is successful, the Court can order an adjustment to the terms of the Will to satisfy the claim. 

When contesting a Will, a de facto partner must first establish the existence of the de facto relationship with the deceased immediately before the death of the deceased person and, then show that he or she has been left without adequate provision. Claims are assessed based on a range of factors and the unique circumstances relevant to each case.

It is generally expected that testators have a moral duty to provide for the proper maintenance and support of their spouse or de facto partner. A de facto relationship exists where a couple of the same or opposite sex and who are not legally married or related by family, live together in a marriage-like relationship. 

Factors considered in establishing a ‘marriage-like relationship’ include the length of the relationship, the care and support of children, the nature and extent of a common residence, the existence of a sexual relationship, financial interdependence, property acquisition and ownership, and the public perception of the relationship.

A de facto partner may make a family provision claim if the proposed distribution under a Will or intestate estate does not make adequate provision. Strict time limits apply for bringing such claims and it is wise to obtain early legal advice. 

Most family provision claims can be settled between the legal representatives of the applicant and estate which will avoid costly Court proceedings.

To reduce the possibility of a family provision claim it is important to obtain good legal advice when preparing your Will and to ensure that your Will is regularly reviewed.

 

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances. 

A trust is an obligation imposed on a person (the trustee) to hold property or income for the benefit of others (the beneficiaries). A trustee is responsible for the operation of the trust. A trustee can be an individual, partnership or a company. There are a number of laws which govern how a trustee must perform his or her obligations to the trust. The primary obligation of a trustee is to act in the best interests of the beneficiaries of the trust.

A formal deed is required to set up a trust. A trust deed outlines the purpose of a trust, the property involved, the rights and obligations of the trustee and beneficiaries and how assets will be distributed to the beneficiaries. It is recommended that a trust deed be prepared by a solicitor.

A trust must have its own Australian Business Number (ABN), which can be obtained online through the Australian Business Register.  

A trust must also have its own Tax File Number (TFN), which can also be obtained online from the ATO.

A trust must be registered for GST if annual turnover is $75,000 or more.

Trusts that run a business must complete a tax return, showing the income the trust earns, deductions it claims, and the amount of income distributed to each beneficiary.

A trust might be an appropriate structure if a business venture will involve a sizeable amount of property and money. That is because a trust can be beneficial in protecting assets and minimising taxation obligations. Trusts are also a common structure choice for family businesses because various family members can be made beneficiaries of the trust that is operating the business. 

A trust is the most complex of all the business structures, with complicated tax implications and legal and compliance requirements. As such, it is highly recommended that advice is sought from a solicitor to check whether a trust suits your circumstances.

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.