The Federal Government has released a mandatory code of conduct to help commercial tenants manage their leases while dealing with the fallout from the coronavirus crisis.
The purpose of the code is to share the risk and cash flow impact of COVID-19 while balancing the needs of both tenants and landlords.
Before we unpack about the key leasing principles, it is important to understand that the code is tied to the JobKeeper program (which we write about in detail here) so it will only apply to commercial tenants who suffer hardship arising from COVID-19 and are eligible for the JobKeeper Payment, with an annual turnover of up to $50 million.
The code will also only apply throughout the term of the JobKeeper program, initially six months.
A summary of the leasing principles
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 period (or subsequent recovery period).
- Tenants must remain committed to the terms of their lease, subject to any amendments that may be negotiated and made through the code. Failure to abide by terms of the lease could mean tenants lose the protections available to them through the code.
- Landlords must offer tenants reductions in rent in the form of waivers (eg rent free period) or deferrals (eg pay later), in proportion to the COVID-19 impact on the tenant’s trade up to 100% of the ordinary amount payable.
- Rental waivers should be no less than 50% of the total reduction in rent, 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. Consideration must also be given to the Landlord’s financial ability to provide such additional waivers. Tenants may also waive the requirement for a 50% minimum waiver by agreement.
- Payment of deferred rent must be balanced out over the lease term occur within no less two years, whichever is greater, unless otherwise agreed by the tenant and landlord.
- 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 mean a repayment is necessary, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should happen until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
- No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. 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.
It is recommended that these principles be applied as soon as practicable.
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
– ie. 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.
How tenants and landlords should approach the challenge
The code makes it clear that every tenant and landlord agreement and relationship is different, so both parties should agree to tailored, bespoke and appropriate temporary arrangements.
The code also recommends that:
– Landlords and tenants work together to keep business moving for both parties, with the aim to resume normal trade as soon as possible.
– Landlords and tenants should negotiate towards fair outcomes for both parties, in good faith.
– Both landlords and tenants will be open, honest and transparent, and provide whatever information is required to get the best possible result.
– Agreed arrangements will take into account the COVID-19 impact on the tenant, including revenue, expenses and profitability, and will be proportionate based on the COVID-19 impact and recovery period.
– Tenants and landlords will recognise that the risk of default on commercial leases will ultimately fall on the landlord.
– If the tenant is in administration or receivership, the application of the code should be modified accordingly.
For more detail and definitions, click here.
Government grants and support
The South Australian government has announced an additional $10,000 grant for small businesses forced to close or suffer significant loss because of COVID-19.
You can view all of the grants and support initiatives state by state, here.
In tough times, these are important opportunities that could protect or even save your business. We’re happy to guide you through the process. Contact the team at Nitschke Nancarrow now.
Please note the government are continually updating us with information, so this is based on the information at hand today. We would suggest keeping an eye on the media for any additional support that may come out in the future and be of benefit to you.
The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Nitschke Nancarrow’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.