Following our recent COVID-19 Q&A Webinar, this information sheet has been prepared by DWF's Property and Construction sector experts to address some of the most commonly asked questions arising in these sectors, and to assist you, our clients and colleagues, in navigating these very challenging times.
What is the mandatory code of conduct for commercial leasing?
The Code was announced by the Commonwealth Government on 7 April 2020 and is designed to allow landlords and tenants to successfully navigate through the COVID-19 crisis through the provision of rent relief to affected tenants and ensuring business continuity. A copy of the Code can be found here.
In summary the Code provides as follows:
• For the duration of the pandemic (and recovery period) a Landlord cannot terminate a tenancy due to non-payment of Rent or draw down on security.
• Tenants detrimentally impacted by COVID-19 are entitled to rent relief commensurate with their downturn in trade.
• Tenants must continue to comply with their lease obligations.
• Landlords cannot charge penalty interest on late rent payments or deferred payments.
• No rent increases for the duration of the Code.
• Landlords must pass on any reduction they receive in statutory charges – (land tax, council rates) or any deferral of loan payments afforded by their banks.
• Landlords and Tenants must negotiate rent relief in good faith.
What relief are banks providing to commercial landlords if the landlord is being required to waive a percentage of rent which could be substantial depending on tenant circumstances?
The Government has been working with the financial sector as part of the whole of industry response to this crisis. The Australian Banking Association has released a COVID-19 response package which details the financial sector's response and relief available to mortgagors. All landlord's should commence discussions with their bank or financiers regarding what individual assistance might be available.
Will there be additional land tax and rates relief?
Yes, the respective state governments in VIC ($420 million), NSW ($440 million) and QLD ($400 million) have already announced land tax relief for landlords that provide rent relief to impacted tenants. Details of how that relief is to be provided in the coming weeks.
Can you provide indicative numbers or $ figures on rent relief requests you have seen in the commercial and retail sectors?
At this stage we are seeing general queries from both landlords and tenants predominantly from the retail and hospitality sectors given the immediate impact of the crisis on those businesses. The level of relief sought varies from tenancy to tenancy.
How can landlords bring tenants to the table for discussion without being able to exercise security for the next six months?
The Government has repeatedly stated that in the absence of agreement between landlord and tenant the tenant must continue to comply with their lease obligations. Given the code is for the benefit of tenants it would surprise if any tenant didn't commence negotiations with their landlord in respect to rent relief.
The Code also states that any tenant that materially defaults under their lease will not be afforded the protections of the Code. Failing to pay rent without an agreement with the landlord would, in all reasonable view, constitute a material default.
Is the 'construction' sector an essential service?
On 25 March 2020, the Prime Minister said that "essential workers" are "someone who has a job". The simple answer is therefore that, at present, any work is regarded as essential. That said, there are a number of public health directions/orders (with legislative force) which prescribe what can and can't be done.
Some industries have been identified as "non-essential". Those industries cannot function (e.g. entertainment venues including licensed premises, retail food venues except for takeaway). The construction industry is not one of those.
For the construction industry, there are two practical issues:
Can I go to work?
From the directions/orders, for all industries that can function, if you can work at home, then you must do so. You can only leave home to work to the extent that it is reasonably necessary to do so.
Applying that to the construction industry:
• Site work cannot be carried out at home and therefore workers are able to travel to work and to perform work other than at home.
• Office work, if it can be done at home, must be done at home. You can only go to the office for and only to the extent that it is reasonably necessary.
These rules apply to all of us individually. If you don't comply, you can and will be fined.
What are my obligations at work?
The directions and orders in each of the eastern seaboard states are worded slightly differently. However, there are some common theme for all industries permitted to function (including the construction industry).
• Gatherings are not permitted. However, that does not apply to workplaces.
• If a gathering does occur, each individual has breached the order (whether in QLD, VIC or NSW).
• In addition, the directions / orders in QLD and NSW also have provisions which apply to the person in control of the workplace. For the construction industry, typically for sites, that will be the contractor:
o In QLD, the obligation is to take reasonable steps to encourage social distancing (e.g. 1.5m apart, washing hand / hand sanitiser / no handshaking).
o In NSW, there is a strict obligation to not allow someone to enter an indoor space unless there is a minimum of 4m2 for each person.
• WHS legislation applies and State regulators are taking a practical approach: e.g. are you making a genuine attempt to comply with the requirements and intent of the directions / orders.
Can we claim COVID-19 related EOTs now?
When do I claim?
The short answer is that most construction contracts have time bars. Given that is the case, notification of likely delays and of delays needs to be given early as do claims for money when available. EOT clauses usually tie the first notification to either becoming aware or ought to be reasonably be aware of a possible delay.
What is my claim?
COVID-19 is not a cause of delay. COVID-19 results in actions which then cause delay, for example:
• supply lines delays (because of COVID-19 results in a factory/ port closure or working reduced load, a province isolated);
• workforce becomes unavailable (due to government restrictions on movement); and
• site unavailable (because of a COVID-19 cluster).
While the party performing the work typically takes the risk of its supply line and workforce, there are possible hooks to claim for delay (and sometimes money). The Principal typically has an obligation to make the site available and failure to do so entitles to the Contractor to time and money. However, if contractor causes the site closure, it will not be able to claim.
These have been discussed in more detail in an article we have previously published - you can access a copy of our article here.
What protections should be putting in place for future building contracts?
There are five primary areas which should be addressed:
1. Doctrine of frustration
The doctrine will discharge the contract where a supervening event causes the obligations unable to be performed because it is radically different. The doctrine should be negatived if the contract was entered into when the impact of COVID-19 was not reasonably foreseeable. While that is unlikely to be the case now, it is simple to negative the doctrine.
2. Preventative measures
The contract should provide for managing the COVIS-19 risks. Typically, the contractor should create a COVID-19 management plan setting out how it will mitigate the risks (e.g. how it will ensure compliance with the legislative directions / order; site inductions, site inspections to check compliance, temperature checks; action plan if site worker tests positive to COVID-19). Consider seeking medical advice to assist with plan preparation, record keeping to evidence compliance and reporting of plan compliance to Principal.
3. Site shutdown
The likelihood of a State-wide construction industry shutdown is receding with the drop in reported COVID-19 cases. However, the risk of an individual site shutdown remains real. One case can lead to a cluster (or an unacceptable risk of a cluster).
The parties should agree their respective rights. The commercial consensus seems that if there is compliance with an approved management plan, then the contractor will be entitled to time but not money. As a result:
• the contractor is relieved from liquidated damages but bears its overheads and ongoing employee costs; and
• the principal bears its financing costs arising from late completion.
4. Social distancing constraints causing productivity loss
For new contracts:
• Contractors are asked to price the cost of social distancing.
• Identify what has been priced (i.e. benchmark the price); e.g. reference requirements of legislative directions / orders.
• Identify what happens if the benchmark changes (tighter or relaxation of constraints); again the commercial consensus is the impact on time but not money if constraints tightened or relaxed.
5. Role of Superintendent
Prescriptive decisions or valuation mechanisms will not work. The impact of COVID-19 on the site is too variable. Decisions about whether work should be suspended (e.g. due to a positive COVID-19 test) need to be made in the particular circumstances. Those decisions can only be in the hands of the Superintendent.
The contract should expressly require the contractor to seek and publish medical advice received and should also entitle the Superintendent to seek and consider medical advice when making determinations (e.g. suspensions, resumptions, actions to be taken such as site cleaning and at whose cost).
What impacts have you seen on ground up / refurb projects kicking off this year in the commercial and residential sectors, when compared to the same time last year?
• There have been reports that commercial property activity has decreased by 80% compared to March 2019.
• There have also been similar impacts reported on residential projects (particularly mixed use with hospitality involved).
• Hotel occupancy rates were at 10 - 20% in March 2020, compared to 80% for March 2019.
• Some developers are taking a long term view and realising there will be opportunities if they can ride out the pandemic.
Are there any winners or good news stories out of the current COVID-19 pandemic?
The States have all introduced packages (involving tax concessions; e.g. payroll tax, land tax).
In terms of development new work, NSW seems to be first out of the blocks:
• more than $250 million to bring forward maintenance on public assets including social housing and crown land fencing; and
• $500 million to bring forward capital works and maintenance.
From what we have seen, QLD and VIC are yet to announce anything in this area, although industry bodies are in the process of presenting a number of projects to the Victorian State Government that are suitable for fast tracking once the pandemic situation eases.
What changes in the future do you predict as a consequence of the current COVID-19 situation in the property and construction space?
Some commercial tenants may review their space needs given the mobilisation of their workforce during the COVID-19 restrictions, assuming that their workforce productivity has not suffered through remote working – this might result in an increase in available space in the leasing market.
Predictions are being made for changes to supply lines, including less dependence on overseas manufactured product. However, the construction sector is highly competitive and in our view price (provided it still meets quality) will always win out.
If you require further information or advice, please contact Lex Orange, Richard Skopal or Andrea Towson.