Prime Minister Scott Morrison announced a mandatory Code of Conduct which outlines a set of good faith leasing principles for commercial tenancies including retail, office and industrial tenancies.
The Code aims to support small and medium sized enterprises (SME) affected by COVID-19 during the government’s business hibernation period. We’ve summarised the key information and listed it below, take a read…
What does the Code of Conduct outline?
- The purpose of the Code of Conduct is to outline a set of good faith principles applicable for commercial tenancies to aid the management of cashflow for eligible tenants and landlords during the COVID-19 pandemic.
- The Code requires landlords to reduce rent proportional to their tenant’s decline in turnover to ensure that the burden is shared between landlords and tenants. This is to be achieved through a combination of waivers of rent and deferrals of rent over the course of the pandemic period via waivers and lease extensions.
- For eligible tenancies, waivers of rent must account for at least 50 per cent of the of the total reduction in rent payable, while deferrals must be covered over the balance of the lease period and in any case for no less than 24 months, unless otherwise agreed by the parties.
- Arrangements will be overseen by binding mediation process and will be implemented and regulated by each state and territory.
Read the full SME Commercial Leasing Principles Code of Conduct here.
Who is eligible?
To be eligible to negotiate under the Code either party must:
- be a business that is in a position of financial distress;
- have a turnover of $50 million or less;
- be eligible to receive support under the JobKeeper program (meaning the business has experienced at least a 30 per cent drop in revenue due to Covid-19 restrictions).
Can my commercial lease be terminated during this time?
Among the principles is a requirement for landlords to refrain from terminating leases due to non-payment of rent during the COVID-19 pandemic period.
Also included are expectations that tenants remain committed to the terms of their lease and that any reduction in statutory charges (e.g. land tax, council rates) or insurance is passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
When does it come to effect?
The Code comes into effect from a date following 3 April 2020 for the period during which the JobKeeper programme is operational. The actual commencement date will be defined by each state and territory government for their jurisdiction.
Is there anything else I should be considering?
Some other matters you might wish to consider include:
- Can a tenant terminate the lease or abate rent if an infection or government regulation forces them to close?
- How should agreements to defer or waive payments be structured to preserve rights in the event of insolvency
- What consequences flow from the regulations issued under the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 No.1 passed by the NSW Parliament
- Can a landlord close down access to the building?
- What steps may a landlord take if the tenant abandons the building? Are they different if the tenant’s conduct is forced by government?
- Who is responsible for fumigation? How are costs allocated between the landlord and tenant?
What are key terms used in the Code?
The following definitions are provided for reference in the application of the Code.
- Financial Stress or Hardship: an individual, business or company’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) that causes the tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments. SME tenants which are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under this Code.
- Sufficient and accurate information: this includes information generated from an accounting system, and information provided to and/or received from a financial institution, that impacts the timeliness of the Parties making decisions with regard to the financial stress caused as a direct result of the COVID-19 event.
- Waiver and deferral: any reference to waiver and deferral may also be interpreted to include other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), or any other such commercial outcome of agreements reached between the parties. Any amount of reduction provided by a waiver may not be recouped by the Landlord over the term of the lease.
- Proportionate: the amount of rent relief proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period, consistent with assessments undertaken for eligibility for the Commonwealth’s JobKeeper programme.
The following scenarios are examples only, noting the circumstance of each landlord, SME tenant and lease are different, and are subject to negotiation and agreement in good faith.
Examples of practical variations reflecting the application of the principle of proportionality may include but are not limited to:
Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis i.e. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.
- At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.
- Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties
So, if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral.
If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.
Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.
The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.
For assistance or advice in relation to these or any other matters in relation to your commercial lease please call us on 02 6583 0400 or send an email to email@example.com