Thinking | 8 April 2020
The National Cabinet’s mandatory Code of Conduct for commercial tenancies (Code), released on 7 April 2020, aims to impose a set of good faith leasing principles for negotiations between landlords and tenants. Specifically, the Code relates to measures the two parties can agree on and implement to alleviate financial stress and hardship stemming from the COVID-19 pandemic.
The Code’s objective is to share the financial risk and cashflow impact during the COVID-19 period in a measured way that appropriately balances the interests of landlords and tenants. It reinforces the Federal Government’s calls for landlords and tenants to engage in genuine negotiations in order to reach agreement on measures and arrangements that alleviate the financial stress and hardship being experienced. In this article, we outline suggestions for both landlords and tenants about what to do now for both current and looming negotiations.
Code implementation and eligibility
The Code will be legislated and regulated in each state and territory. Once enacted, the Code will be mandatory and provides for a range of rent relief measures for commercial, industrial and retail tenants who meet the eligibility criteria for the Commonwealth Government’s JobKeeper programme and be an SME. This effectively means a tenant must:
(a) have an annual turnover of less than $50 million; and
(b) have a 30% or greater loss in revenue.
The annual turnover threshold applies to franchises at the franchisee level, and at a group level for tenants who are retail corporate groups. This will see some retail corporate groups being unable to enjoy the benefits of the Code.
The Code mandates leasing principles that are to apply on a case by case basis. The leasing principles operate as a guide to the negotiations landlords and tenants are encouraged to have to reach agreement on measures and arrangements that suit the particular case. The key principles of the Code are as follows:
- No termination - Landlords must not terminate leases for non-payment of rent.
- Lease compliance - Tenants must continue to comply with their lease obligations otherwise tenants will jeopardise the protections provided by the Code.
- Rent reductions - Landlords must offer tenants proportionate reduction in rent in the form of waivers and deferrals based on the reduction in the tenant’s trade. Rental waivers must constitute at least 50% of the total rent reduction.
- Landlords to pass on benefits - The Landlord must pass on any reduction it received in statutory charges (eg land tax, council rates).
- No penalty - The Landlord must not charge fees or interest on rent or payments being deferred.
- No draw on security - Landlords must not draw on a tenant’s security (bond, bank guarantee or personal guarantee).
- Term extensions - Landlords should allow tenants to extend the lease for the period the subject of the rent deferral.
- Rent freeze - Landlords to freeze rent increases (other than turnover rent in retail leases) for the duration of the COVID-19 pandemic period and a reasonable recovery period after it passes.
All landlords and tenants should inform themselves of the overarching principles outlined in the Code and use those principles to guide them during negotiations in tenancy arrangements for the COVID-19 period to ensure a mutually acceptable outcome is achieved.
Landlords - Where to start?
Here are some suggestions on what landlords can do now to accommodate the Code’s requirements in current and looming negotiations with tenants.
|Code application||Consider whether the Code applies to your circumstances.|
|No enforcement||Defer tenancy enforcement (ie by way of terminations or calling on tenancy securities). It is in the landlord’s interests to have a rent-paying tenant on the other side of the ‘hibernation’ period.|
|Stress test the portfolio||Conduct a stress test of your tenancy portfolio to identify imminent expiry dates and which leases still have at least 12 months to run. This will help you decide on the relief packages that could be offered to your tenants.|
|Immediate measures||Identify costs and expenses which you can waive now to assist tenants.|
|Start a conversation||Approach your tenant and have full and frank discussions about your tenant’s financial situation, as well as discussions about the losses and overheads that you need to cover for your own business. Ask the tenant to produce information which demonstrates their eligibility for the JobKeeper programme as well as data showing the financial stress suffered by the tenant. In your discussions, have regard to the fact that your tenant also has fixed overheads to pay.|
Tenants - Where to start?
Similarly, here are some suggestions on what tenants can do now to decide whether the Code applies to them and guide any current and looming negotiations with landlords.
|Code application||Consider whether the Code applies to your circumstances.|
|Audit the lease periods||Consider whether your lease will expire imminently, or whether it still has at least 12 months to run. Depending on the term of your existing lease, workshop your best and worst case scenarios. For example, if your lease expires in less than 12 months, consider whether it will be more advantageous for you to negotiate an extension of the lease with a rent reduction, or whether you will vacate the premises when the lease expires.|
|Move now on changes||If your lease will soon expire, consider whether you want to take this opportunity to reduce floor space. Consider discussing with your landlords the possibility of relocating to another premises in the building or shopping centre if other space becomes vacant.|
|Data gathering||Gather your financial and sales data and make sure you have a good grasp of your losses. Be prepared to produce information which demonstrates your eligibility for the JobKeeper programme as well as data showing the financial stress suffered by you. This information will be required to calculate any proportional rent relief.|
|What is happening in your building?||Has the landlord closed access to your building? If your lease is a commercial or industrial lease, consider the percentage of staff who are working from home. Has the landlord ceased the use of any amenities in the building? These considerations can assist with calculating your rent relief package.|
|Start a conversation||Talk to your landlord and have open and frank discussions. Have regard to the fact that your landlord also has overheads to pay - in some cases, your rent is the landlord’s main stream of income.|
If landlords and tenants cannot reach an agreement on leasing arrangements, the Code will allow the dispute to be referred to the applicable state or territory leasing dispute resolution process for binding mediation. The enabling legislation to come will provide more detail on how this will work.
We can help
We will continue to watch the situation closely and share more thoughts on this rapidly changing situation.
Please do not hesitate to reach out to us to discuss ways in which we can help you with those conversations.
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