The Government has announced a mandatory code of conduct for commercial tenancies to support businesses affected by the coronavirus pandemic.
The Code of Conduct (‘the Code’) aims to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants.
Firstly, it must be stated at the outset that more information and details of the Code are required before any informed decision can be made on how a business should proceed in light of the introduction of the Code. Many of those working in the commercial sector, while broadly supportive of the announcement, still say they need to see more detail on how the code and its provisions will work before they can predict how effective it will be. The federal government has provided the framework for the Code, but the States and Territories still need to enact it in the same way for it to be uniform.
The Code will apply to smaller commercial tenants who are both eligible for the Commonwealth Government’s JobKeeper assistance package and have less than $50 million turnover. For more information on JobKeeper eligibility, click here.
The code will be guided by the following principles:
- Where it can, rent should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome;
- There will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between landlords and tenants;
- There will be a prohibition on termination of leases for non-payment of rent (lockouts and eviction);
- There will be a freeze on rent increases (except for turnover leases);
- There will be a prohibition on penalties for tenants who stop trading or reduce opening hours;
- There will be a prohibition on landlords passing land tax to tenants (if not already legislated);
- There will be a prohibition on landlords charging interest on unpaid rent;
- There will be a prohibition on landlords from making a claim to a bank guarantee or security deposit for non-payment of rent; and
- Ensure that any legislative barriers or administrative hurdles to lease extensions are removed (so that a tenant and landlord could agree a rent waiver in return for a lease extension).
The following is an example scenario:
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% cashflow 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 cashflow 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 cashflow 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.
While the Code provides a guide for negotiation between the parties, open and productive communication between landlords and tenants remains essential in these unprecedented times.