On 7 April 2020, the National Cabinet released the National Code of Conduct (Code) to SME industrial and retail tenancies affected by the COVID-19 pandemic.
The purpose of this Code is to impose the certain set of rules in negotiating good faith amendments to the existing leasing arrangements.
Who does the Code apply to?
The Code applies to all commercial leases, including retail, office and industrial leases where the tenant:
has an annual turnover up to $50 million; and
is suffering financial stress or hardship as a result of the COVID-19 pandemic, as defined by their eligibility for the Commonwealth Government’s JobKeeper programme.
The object of the Code is where the parties have an obligation to negotiate in “good faith” and act in an “open, honest and transparent manner”, whilst seeking to appropriately balance the interest of tenants and landlords.
It is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant taking into account their particular circumstances on the following on a case by case basis:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period or reasonable subsequent recovery period.
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
The tenant who pays $10,000 per month in rent and it has seen a drop in turnover of 60% in April 2020 when comparing to the same month in 2019. Under this Code, the landlord must:
- Grant a proportionate amount of waived rent equal to 50% of the reduction of turnover; and
- The remainder of lost turnover is converted into rent repayments.
- Reduction in turnover = 60%. Base Rent = $10,000
- 60% x $10,000 = $6,000
- Therefore $3,000 (50% of $6,000) of rent is written off and $3,000 of rent is deferred.
- This means that the tenant only has to pay $4,000 a month in rent during the COVID-19 pandemic.
- Deferrals must be covered over the life of the lease and be no less than 24 months.
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
- Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
- If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending or the existing lease expiring and taking into account a reasonable subsequent recovery period.
- There will be a prohibition on landlords charging interest on unpaid rent.
- Landlords must not make a claim to a tenant’s security deposit or a bank guarantee for the non-payment of rent.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
- Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
The commencement date of the Code will be determined by each State and Territory, with the Code to apply from a date after 3 April 2020 for the period during which the JobKeeper programme is operational.
If you are the landlord, you should carefully consider key listed above. The Code as it currently stands is more in favour of tenant.
When you negotiate the rent reduction with your tenants, we suggest that:
Request for relevant information and evidence to demonstrate that the tenants are eligible for relief under the Code. You may pay attention to tenants’ online sales and may seek comfort from the tenants’ accountants and bankers about the information provided by tenants;
Prepare a variation of lease or deed to protect your interests while still complying with the requirements of the Code.
Imposing regular reporting obligations to tenants on trading etc.
We recommend that you should commence discussions with the landlord as soon as possible in accordance with the Code, with a view to agreeing a reduction or deferral of rent payable under the tenancy agreements during the COVID-19 pandemic and a subsequent recovery period.
You should ensure that any approaches to the landlord is undertaken in accordance with this Code in good faith. You should also proactively and clearly communicate with your landlord regarding any decisions you make about full or partial closure of your premises.
Where both parties cannot reach agreement on leasing arrangements, the matter may be referred to state or territory retail/commercial leasing dispute resolution processes for binding mediation. However, there are significant questions regarding this dispute resolution process during this period. Even where mediations will be held via teleconferencing or videoconferencing, the sheer volume of matters that may be referred is likely to result in significant delays. Hence, it is practical to secure a good mutual resolution with the landlord as practically soon as possible.
For your legal needs, call Phoenix Law & Associates on 1800 GETHELP!