Reopening businesses post COVID-19 – lease considerations for landlords and tenants (commercial and retail)

The easing of lockdown restrictions in all states and territories across Australia is seeing a gradual return to the workplace, both in commercial office buildings, and retail shopping centres. As landlords, building managers and tenants prepare for this, it is undeniable that how leases will be negotiated and administered has changed forever.

Legislative changes

The National Cabinet Mandatory Code of Conduct (Code) was announced on 7 April 2020. Following this, all states and territories have separately introduced legislation implementing the Code. The period to which these changes apply vary across the jurisdictions, ranging from September 2020 to until the government declares that no COVID-19 emergency is in force.

Although these Code-based provisions are generally only applicable where the tenant is a small to medium size business affected by the current COVID-19 pandemic, the principles of negotiation in good faith and compromise are encouraged in dealings between all landlords and tenants affected by the pandemic.

Back to the office

It is anticipated a majority of workers will be back to the office by August 2020. The work environment, however, will be drastically different to what it was before the lockdown. Now more than ever, landlords and tenants should know what their rights and obligations are under their leases.

Some relevant considerations in conjunction with back to work plans, for both landlords and tenants, are set out below:

• Does the lease contain service interruptions provisions? If so, what impact may delays in accessing premises, associated with social distancing and lift restrictions, have? Could they amount to service interruptions and trigger rent abatement provisions under the lease? Should new provisions regarding rent abatement for service interruptions be considered as landlords and tenants look to re-negotiate their current leases and enter into new leases?
• As remote working becomes part of the norm, there will be a reduced need for office space which may lead to lower rents in the market. This is relevant for leases with upcoming market rent reviews. Market rent review provisions should be carefully considered, including in relation to any provisions preventing a reduction in rent. There may also be a greater trend of market rent reviews being used more frequently than fixed rent reviews during the life of a lease and not just at lease renewals.
• What are each party’s cleaning obligations under the lease?
  • Where a lease requires cleaning to a ‘reasonable standard’,  landlords and tenants should seek to agree, as soon as possible, what it means in the current environment.
  • Where the tenant must pay a separate premises cleaning charge and building cleaning charge, can the landlord add additional cleaning charges incurred as a result of the current environment to the amount payable by the tenant?
  • Does the lease allow a tenant to request additional cleaning from the landlord, or allow the landlord to require the tenant to  perform additional cleaning where the tenant is responsible for the cleaning of its own premises? A failure to appropriately clean premises may be a breach of a tenant’s obligation not to cause a nuisance to other occupiers of a building.
• Leases, especially those in high rise commercial office buildings or  shopping centres, often contain tenant or centre guidelines, which can be changed by the landlord from time to time. Would updating these guidelines assist in the current environment?
• As businesses bring back their workforce, it is anticipated that the  most common approach will be to stagger the times at  which employees travel to and from work, which will affect the hours of business of a tenant. Many leases generally contain provisions for ‘core hours’ in relation to building services – do these need to be
  extended, and if so, how is the increase in cost to be shared?

Retail considerations

As well as the above, retail landlords and tenants should also consider the below in any current and future lease negotiations:

• Retail rents are often a combination of a fixed amount and additional  turnover rent. As retail tenants around Australia are fighting to survive, it should be expected that more and more retail tenants will seek to negotiate rental payments to be predominantly based on the gross income generated by the tenant at the premises.
• As consumers move towards online shopping, does the lease capture online sales in the tenant’s reporting requirements and the calculation of turnover rent? This could be especially pertinent to those businesses that did not traditionally have an online presence, but have diversified as a result of changing consumer habits as a result of the COVID-19 lockdown.
• ‘Core trading hour’ provisions are likely to become more heavily negotiated, and parties should consider what trading would be expected at a minimum, as well as the circumstances which would relieve a tenant of those obligations.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.