On 7 April 2020, the Prime Minister released the National Cabinet’s formal response to specific commercial leasing matters by issuing the ‘National Cabinet Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19’. The Code confirms the Prime Minister’s announcement of 3 April 2020, providing more but consistent detail for stakeholders.
The Code’s purpose is to
a) create a set of good faith leasing principles for commercial tenancies (including retail, office and industrial tenancies), and;
b) impose those principles in negotiating amendments to existing leasing arrangements.
The Code is intended to create a consistent national response to commercial lease issues during the crisis. It will complement, not supersede, relevant State and Territory legislation. This means that the extent to which the Code’s purposes comes into effect will be set out in the Regulations each jurisdiction creates in adopting the Code. We will monitor this situation closely and provide further updates as they come to hand.
- It focuses on commercial leases adversely affected by the COVID-19 crisis. It does not apply to residential leases;
- there is an important eligibility criteria (turnover of $50m or less and eligible for the JobKeeper package);
- notwithstanding its mandatory nature, the Code will allow tenants and landlords to agree to bespoke temporary arrangements according to their individual circumstances, and landlords will be required to negotiate such arrangements with their tenants based on their individual circumstances;
- to ensure sharing of the burden between landlords and tenants, rent reductions will be proportionate, based on the tenant’s reduction in turnover;
- banks and financial institutions, whether Australian or foreign, are expected to support landlords and tenants in working together to implement the Code;
- rent relief policy will contain mutual obligations for small and medium businesses, including not-for-profits (SMEs), to:
- where eligible, retain their employees through JobKeeper; and
- provide rent relief to any subtenants;
- the Federal Government is acting as a ‘model landlord’ by waiving rents for its SME tenants across Australia.
Eligibility and qualification to access the Code
The Code is focused on commercial leases, but even then it does not apply to all such arrangements.
To fall within the Code, a party to the commercial lease must have a turnover of less than $50 million and be eligible for participation in the JobKeeper scheme (meaning that in addition to the turnover threshold, it must also be able to evidence a more than 30% reduction in its turnover as a result of COVID-19). In the case of franchises, the $50 million threshold will apply to the franchisee. For corporate retailer groups, the threshold will apply at the group level.
As a practical matter the eligibility requirements will in most instances be satisfied by the tenant.
Commencement and duration
This may differ between jurisdictions as the Code will come into effect ‘from a date following 3 April 2020’ as determined by each State/Territory (as they formally adopt the Code). It will run for so long as the Federal JobKeeper program remains operational. For present purposes the Code will run for at least the next six months.
The Code in a nutshell
Rather than prescribing specific rules and outcomes, the Code provides a framework to encourage landlords and tenants adversely affected by the COVID-19 crisis to resolve tenancy disputes. It does this by setting out a series of principles to be applied by affected stakeholders (see below). Failing resolution, the parties must go to mediation (as prescribed by each State or Territory in its adopting regulations).
The principles are:
- must not under existing agreements, terminate leases for non-payment of rent and should seek to waive other expenses or outgoings payable by a tenant during any period that the tenant is unable to trade;
- must offer tenants a proportionate reduction in rent of up to 100% of what is usually payable, by way of waiver or deferral, to be determined on a case-by-case basis and based on the tenant’s proportionate reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period;
- must pass on to the tenant any reductions in statutory rates and charges and/or insurance(s), where applicable;
- must share with the tenant any benefit received due to deferred loan repayments provided by a financial institution;
- must not draw on a tenant’s bank guarantee or other security for non-payment of rent;
- must not apply any fees, interest or charges to rent waived and/or deferrals of rent;
- must allow tenants to reduce opening hours or cease to trade because of the COVID-19 pandemic without imposing any penalties or levies;
- agree to a freeze on rent increases (except for retail leases based on turnover rent).
- Must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code.
- must continue to comply with all provisions of their lease that have not been amended by agreement under the Code. Failure to do so will forfeit their rights to protection under the Code.
3. Achieving the Code’s purposes
- The Code requires the parties to negotiate amendments to existing leasing arrangements to address the adverse effect on a business’ trade because of the COVID-19 pandemic.
- The parties must negotiate amendments in good faith. This means that landlords and tenants must be honest and fair in their negotiations and have regard to each other’s interests.
- Rental Waiver. The Code requires that any rental waiver must be for no less than 50% of the total reduction in rent. If the tenant requires more than 50%, regard must be had to the landlord’s financial ability to provide any such additional waiver, and the tenant may waive this requirement.
- Deferred Rent. Unless otherwise agreed, deferred rent must be payable over the balance of the lease term or for a period of no less than 24 months, whichever is the greater. Repayment is to commence from the earlier of the end of the COVID-19 pandemic or expiry of the lease, taking into account a reasonable subsequent recovery period.
- Ability to extend term. Tenants should be given an opportunity to extend their leases for a period equivalent to the period of any rent waiver or deferral.
Where landlords and tenants cannot reach agreement on their leasing arrangements, they:
a) must refer their dispute/non-agreement to the applicable State or Territory retail/commercial leasing dispute resolution processes; but
b) must not use such processes to prolong or frustrate amicable resolutions.
Comments - there are important gaps in the Code
- Residential leases. The Code does not apply to residential leases. This is an important gap that needs filling.
- Some important commercial leases are not covered. The Code does not apply to every dispute between landlords and tenants. There is not only a cap on the size of an affected participant (ie. turnover must not exceed $50 million) but also the participant must be adversely affected by the current crisis (ie. be eligible for JobKeeper package). Accordingly, commercial tenancy disputes:
a) not affected by the crisis are excluded from the Code;
b) between larger stakeholders are also outside of the Code. The PM has previously expressed the view that big landlords and tenants can work things out for themselves.
- Whilst National Cabinet (again) expressed the expectation that banks and other financial institutions would support landlords and tenants to work together to implement the Code, this is not included in the Code (leaving a gap on how such that the banks/financial institutions are required to provide relief to landlords who may be bound under the Code to provide relief to tenants). Whilst larger landlords may have access to flexible arrangements with their lenders, this may not be as easy for the many ‘mum and dad’ landlords who have purchased an investment property, such as a shop or small factory, which they lease to a small business tenant who is eligible for relief under the Code. Currently, the Australian Bankers Association refers to relief to be extended by Australian banks to small businesses who need assistance because of COVID-19. On its website, the question ‘what is the definition of a small business’ is answered with simply ‘for eligibility criteria, contact your bank.’ Also, interest continues to accrue on loans where relief has been provided, meaning that many landlords will come out of COVID-19 with an increased debt and/or longer loan term.
- The Code provides that landlords are required to pass on any reductions in statutory rates and charges and/or insurance which may be charged to the tenant (either in whole or proportionately) as part of outgoings/operating expenses under a lease. However, where outgoings/operating expenses are payable under a lease, they are often very broad and will almost certainly comprise many charges other than those specified. In that case, is it to be left solely to the tenant to try to negotiate with the landlord with respect to reductions in any other charges payable under the lease?
- Tenants will need to ensure that they comprehensively negotiate amendments required to the lease such that they are able to continue to comply with all unamended provisions of the lease and sustain this during the COVID-19 crisis. If they fall foul of this, they run the risk of losing Code protection and exposing themselves to the termination of their lease.
If you are unclear about any of these points or need assistance with your property matters, please get in touch with us today on 1300 565 846.