COVID-19 UPDATE FOR LANDLORDS AND TENANTS
THE COVID-19 LEASING CODE OF CONDUCT
The National Cabinet has released the ‘Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19’, a code directed at small/medium enterprise (“SME”) tenants. This will take effect on a date set by each state or territory after the 3rd of April 2020 and will be in effect for as long as the Commonwealth JobKeeper program is operating.
The Code of Conduct helps the management of cash flow for SME landlords and tenants through setting out principles to negotiate amendments. It is implemented in each state and territory through their own regulation and legislation. The objective is to help proportionately share the financial impacts of the COVID-19 pandemic in a measured way. This while appropriately balancing the interests of both landlords and tenants as well.
The Code has been put together to support small and medium enterprises, and applies to commercial leases, which includes office, retail and industrial leases.
It is mandatory for SME tenants that, as a result of COVID-19, are suffering financial hardship or stress. It is based on a proportionality principle, this means that the agreements made in rent reduction will be based on how much the downturn has been for the tenant. Say, for example, the tenant has a downturn of 35% due to the COVID-19 pandemic, then the rent will be reduced by 35%, proportionate to the downturn for the tenant. The agreement should also include a reasonable recovery period for after the pandemic is over, as defined by the Australian Government.
If the tenant and landlord cannot come to a suitable solution for both parties, then the Code dictates for them to go in to mediation.
Financial hardship or stress is when a tenant business cannot generate enough revenue to be able to meet its financial and/or contractual commitments due to COVID-19. A business will automatically qualify if they are eligible for the JobKeeper programme, which has been rolled out in relation to the COVID-19 pandemic, and has set out eligibility as a downturn of 30% or more.
To be considered SME the annual turnover of the business has to be less than $50 million. If not eligible for the JobKeeper programme, a business can prove its eligibility under the Code through information gathered from accounting systems or financial institutions.
The Code has some overarching principles set out, as well as 14 leasing principles. The landlords are expected to make agreements with their tenants based off each tenant’s current situation, meaning they need to make specific agreements with all of them on a case-by-case basis, if they fall within the eligible category. In short, the overarching principles set out that:
The landlords and tenants have to work together to help business continue through the pandemic, and to recommence after it, with a reasonable recovery period. They must discuss relevant issues and work towards finding mutually satisfactory outcomes, and they must negotiate in good faith. Open, honest and transparent manners are demanded, with sufficient and accurate information provided from both parties. They will also assist each other in dealing with other stakeholders (such as utility companies, governments, financial institutions and so on).
Any agreements will be proportionate and appropriate, based on the impact of COVID-19 plus a reasonable recovery period.
As all premises and their commercial agreements are different it is not possible to create a collective industry position, and so the Competition and Consumer Act 2010 is still to be recognised by all parties.
When negotiating temporary arrangements, the Parties need to take some things in to account, such as;
that the risk on default on commercial leases is ultimately on the landlord;
whether the SME suffered financial hardship due to COVID-19;
whether the lease has or is soon to expire; and
whether the tenant is in administration or receivership.
Leasing Principles
Landlords must not terminate leases due to non-payment of rent during COVID-19 pandemic period, or reasonable subsequent recovery period.
Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code. Any protections provided under the Code will be forfeited by the failure to do so.
Proportionate reductions in rent must be offered by landlords based off of the tenants reduction in trade, these will be payable in the form of waivers and deferrals (defined within the Code).
Rent waivers must be no less than 50% of the total rent reduction and subject to the position of the landlord, a greater rent reduction can apply.
Payment of rental deferrals must be amortised over the lease term and of a period of no less than 24 months, whichever is greater, unless otherwise agreed.
Any reduction in statutory charges (e.g. council rates) or insurance will be passed on to the tenant proportionately applicable under the terms of the lease.
If the landlord receives any benefits due to referral of loans payments they should seek to proportionately share this with the tenant.
During the time the tenant is not able to trade, the landlord should seek to waive recovery of expenses where appropriate. Landlords reserve the right to reduce services as required in such circumstances.
If repayments are necessitated by the arrangements negotiated under this Code, this should occur over an extended period of time. No repayments are to commence before the end of the COVID-19 pandemic (as defined by the Australian Government), or the existing lease expires, taking into account a reasonable recovery period.
Fees, interest and other charges are not to be applied with respect to rent waived, and no fees, charges or punitive interest is to be charged on any deferred charges.
A tenant’s security bond is not to be used for the non-payment of rent.
The tenant should be provided with the opportunity to extend its lease for an equivalent period of the rent waiver in order to provide the tenant with additional time to trade during the recovery period.
Landlords agree to a freeze on rent increases (except for leases based on turnover rent).
Landlords may not apply any penalties if tenants reduce opening hours or cease to trade due to the pandemic.
All principles are to be adhered to for as long as the COVID-19 pandemic is ongoing, as defined by the Australian Government.
Should you have any questions or require some assistance with negotiating new lease terms, please contact our Commercial and Property Lawyer Jaime Richards at jaime@wallaceweir.com.au or team@wallaceweir.com.au 1300 011 123.
Wallace Law Group – assisting business during COVID-19
