Landlords and Tenants, you must negotiate in good faith!
Today Scott Morrison finally revealed the direction of commercial leases, and the message is unambiguous - Landlords, Tenants, you must negotiate in good faith. (Oh but remember to maintain that 1.5 m social distance)
The common questions among landlords and tenants --- "Can I not pay rent?", "I am forced to shut door but my landlord wants me to continue to pay rent", "Can I evict my tenants?" --- are answered.
Indeed the questions were addressed a week ago, but too many were confused, and the principles of 'good faith' and 'proportionality' were not mentioned until today.
A mandatory code compelling negotiations between landlords and tenants is forthcoming. This message finally sheds lights on what both parties should do and must do.
Here are two extracts from today's announcement:
"What is important as part of this code is that both parties negotiate in good faith, that there is a proportionality principle that needs to be in this code. And that proportionality principle is simply this, that the turnover reduction of the tenant needs to be reflected in the rental waiver of the landlord."
"What we want to do is have landlords and tenants in the room to ensure that they can work these issues out between them, so they can have an arrangement which enables them to get through this period and to get to the other side. The banks will need to come to the party as well."
What does "good faith" mean?
Good faith requires parties to an agreement to act reasonably and not arbitrarily or for irrelevant purpose.
You'll act in good faith if you:
Be honest about your circumstances.
Co-operate with each other.
Consider each other's legitimate interest.
Compromise if necessary to achieve a mutually beneficial outcome.
These conduct lack good faith:
Dishonest, lie, mislead and misrepresent the true circumstance.
Act for ulterior motive.
Failure to consider the legitimate interests of the other party.
Silence and being unresponsive to another.
What does "proportionality" mean?
This is not a straight forward concept. Generally, an outcome is proportionate if a proposed solution demonstrates a reasonable relationship between the real purpose and the means sought to achieve it.
The less confusing term would be, fair. Landlords and tenants must be fair to each other. What Scott Morrison set out in his announcement was a great example. I will describe several more examples relevant to the most common questions asked:
If a tenant has to completely cease trading (such as massage parlor, nail salon, bar, karaoke, gym, yoga studio), then the landlord should offer rent-free period.
If a tenant continues to trade but all or most of its staff are working from home (such as most professional services), then the tenant should ascertain the proportion of income that is reduced due to pandemic, and the landlord should offer rent reduction.
If a tenant continues to trade at the premises but foot traffic is significant reduced (such as restaurant, cafe and takeway), then the tenant should ascertain the proportion of income that is reduced due to pandemic, and the landlord should offer rent reduction.
Talk to each other and be fair!
I trust that there shouldn't be any more confusion about what landlords and tenants should be doing moving forward.
Can we please avoid this:
And be like this (maybe after the pandemic):