What is the Code and How will it be Implemented?
In the commercial leasing space, the National Cabinet has recently announced a new mandatory Code of Conduct for existing SME tenancies of commercial property (including retail, office and industrial) suffering financial stress or hardship as a result of COVID 19 (Code).
In this first update, we will outline what is in the Code, and how it will be implemented. In a second update to be released shortly, we will comment on some key aspects that landlords and tenants of commercial property need to consider when negotiating and implementing temporary arrangements to comply with the Code’s requirements.
The Code sets out new SME commercial leasing principles for negotiating temporary arrangements such as:
- landlords will have to reduce rent (by a waiver or deferral of up to 100%) in proportion to the reduction in the tenant’s revenue due to COVID-19 (and a subsequent reasonable recovery period):
- by a waiver to account for at least 50% of the rent reduction; and
- may offer a deferral of rent if amortised over the greater of the remaining term of the lease and a period of 24 months, unless the parties agree otherwise;
- notably: a) the reduction must be consistent with JobKeeper eligibility assessments and b) rent waivers and deferrals must not carry any fees, interest or other charges
- a landlord receiving any of the following should pass on to a tenant proportionately:
- any reduction in statutory charges or insurance; and
- any loan payment deferral received by a landlord from its bank (under the Australian Bankers Association COVID-19 response)
- where appropriate, landlords should 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 – a landlord may reduce services as required in that circumstance;
- negotiated repayments of waived rent and outgoings must be over an extended period to avoid undue financial burden on the tenant, and only commence on the earlier of the COVID-19 pandemic ending (as declared by the Australian Government) and the expiry of the existing lease term;
- landlords must not terminate the lease or draw on security (or personal guarantees) for non-payment of rent;
- tenants must continue to honour their obligations under the lease subject to arrangements negotiated under the Code.
- Additional matters:
- landlords must offer an extension of lease for an equivalent period to the rent waiver or deferral period to allow the tenant additional time to trade after the COVID-19 pandemic ends;
- rent increases are frozen (except for turnover rent) until a reasonable recovery period after the COVID-19 pandemic ends;
- landlords cannot prohibit or impose a penalty if a tenant reduces opening hours of ceases to trade due to the COVID-19 pandemic.
What tenancies does the Code apply to?
This Code applies to all tenancies that are 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, with an annual turnover of up to $50 million (called SME tenants). The threshold is calculated at a franchisee level for franchises, and at group level for retail corporate groups (not on the individual retail outlet).
The Code will also apply to the relationship between head tenants and subtenants.
The Code will be given effect and commence through relevant state and territory legislation or regulation as appropriate – click here to view a copy of the Code.
Negotiating Temporary Arrangements
Overarching Principles – these principles require the parties to:
- take into account the impact of the COVID-19 pandemic on the tenant;
- work together, negotiate in good faith, and deal openly honestly and transparently in providing information;
- assist each other in their respective dealings with other stakeholders (eg. banks, utility companies, government);
- address each lease on a case-by-case basis and take into account existing arrears and holdover / monthly tenancy arrangements;
- have due regard to a formal insolvency of the tenant.
Landlords cannot seek to permanently mitigate the risk of default by a tenant.
Disputes – if lease arrangements due to COVID-19 cannot be agreed, either party may refer the matter to binding mediation. Landlords and tenants must not use mediation to prolong or frustrate the facilitation of an amicable outcome.
Enacting the Code into Legislation
The Victorian Parliament will be meeting on 23 April to urgently pass legislation to give effect to the Code. The Victorian Government has indicated that to encourage commercial landlords to pass on rent relief to tenants, any landlord providing tenants impacted by COVID-19 with rent relief, will be eligible for a 25 per cent discount on their land tax, with any remaining land tax deferred until March 2021. We will further update you once the legislation has been passed by Parliament.
Please stay tuned for our second update on the Code, which will comment on key aspects that landlords and tenants of commercial property need to consider when negotiating and implementing temporary arrangements in accordance with the Code and legislation.
In the meantime, if you require any assistance with your commercial leasing needs, please get in touch.