The National Cabinet Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19 (“Code”) was released on 7 April 2020.
Purpose, start and end date
The Code aims to share the financial risk and cashflow impact during the COVID-19 period, between tenants and landlords proportionally. It is a dramatic shift from usual leasing practice. Landlords are required to agree to temporary arrangements for each tenant’s specific circumstances.
There are principles and requirements that the parties are to apply to lease negotiations and the temporary arrangements.
The Code applies and comes into effect from the date set by each state and territory. It will end when the JobKeeper programme ends. Note, the temporary arrangements may continue beyond this.
What leases does it apply to?
It applies to all retail, office, commercial and industrial leases where:
- the tenant is suffering financial stress and hardship due to COVID-19. Tenants eligible for the JobKeeper programme automatically qualify; and
- the tenant’s annual turnover is below $50 million.
The Code is also says it is to apply “in spirit” to all tenancies affected by the COVID-19 pandemic even if they don’t meet the criteria.
Overarching Principles in reaching temporary arrangements
The following principles apply to reaching temporary arrangements. The landlord and tenant are to:
- work together, to ensure the business continues and to enable normal trading at the end of the COVID-19 pandemic and during a reasonable recovery period.
- discuss relevant issues and work towards achieving mutually satisfactory outcomes.
- negotiate in good faith.
- act in an open, honest and transparent manner.
- provide sufficient and accurate information.
- take into account the impact of the COVID-19 pandemic on the tenant, specifically to its revenue, expenses, and profitability.
- agree to temporary, proportionate and appropriate arrangements, arrangements that are to continue for a reasonable recovery period.
- assist each other with other stakeholders including governments, utility companies and banks/other financial institutions.
- take into account the fact that the risk of default on commercial leases is borne by the landlord.
- consider their specific lease, circumstances and factors.
The following leasing principles should be applied to negotiations and temporary arrangements:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period or reasonable subsequent recovery period.
- Tenants must comply with the terms of the lease, subject to any agreed changes. If they don’t, tenants lose any protections provided under the Code.
- Landlords must offer tenants proportionate reductions in rent, in the form of waivers and deferrals, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- Rental waivers must be no less than 50% of the total reduction in rent payable and maybe more.
- Rent deferrals are to be paid by the tenant over the greater of the lease term or a period of no less than 24 months, unless agreed otherwise.
- Repayments should not start until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring and taking into account a reasonable subsequent recovery period.
- The landlord is to pass on any reduction in statutory charges or insurance to the tenant in the appropriate proportion applicable under the terms of the lease.
- A landlord should seek to share any benefit it receives from its financiers with the tenant in a proportionate manner.
- Landlords should seek to waive recovery of any other expense or outgoing payable, during the period the tenant is not able to trade. Landlords can reduce services in such circumstances.
- No fees, interest or other charges should be applied with respect to rent waived or deferred.
- Landlords must not draw on a tenant’s security for the non-payment of rent during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period.
- No rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.
- Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade.
What if the landlord and tenant can’t agree?
They will be required to attend a binding mediation with the relevant authority in their jurisdiction.
Example 1: A tenant with a 60% loss in turnover
- A guaranteed 60% cash flow relief applies.
- At a minimum, at least half (so 30%) is rent free/waiver. The other half could be deferred or as agreed otherwise.
- So, if the monthly rent was $10,000:
- the tenant continues to pay $4,000/mth
- $3,000/mth is not paid, it is rent free
- $3,000/mth is repaid later and accumulates each month
Example 2: A tenant with a 100% loss in turnover
- A guaranteed 100% cash flow relief applies.
- At a minimum, at least half (so 50%) is provided as rent free/waiver. The other half could be deferred or as agreed otherwise.
- So, if the monthly rent was $10,000:
- the tenant does not pay any rent
- $5,000/mth is rent free
- $5,000/mth is repaid later and accumulates each month
The Code also points out that:
- Care should be taken to ensure that any repayment of deferred rent does not compromise the ability of the tenant to recover from the crisis; and
- The parties are free to agree to alternative arrangements.
The Code requires landlords and tenants affected by COVID-19 to negotiate within a set of broad principles. Relevant parties should only do so once they fully understand their legal rights and financial positions. It is appreciated that this is difficult to do in the circumstances, especially as the legislation has not yet been passed. However, parties are encouraged to plan and prepare for the upcoming negotiations and to start open communications with each other and relevant stakeholders.
If you would like advice from one of our highly experienced leasing lawyers, please call us on 1300 55 88 03 or email us at firstname.lastname@example.org