On 7 April, the National Cabinet released a Mandatory Code of Conduct for commercial leases with small to medium enterprise tenants who are suffering financial stress or hardship due to the COVID-19 pandemic. The tenant must meet certain criteria for the Code to apply.
Who does the Code of Conduct apply to?
The Code of Conduct is mandatory for a commercial tenant who has an annual turnover of up to $50 million and is eligible for the Commonwealth Government’s JobKeeper programme, which means their turnover must have fallen by 30% or more. The Code of Conduct is to be legislated by each state government separately over coming weeks, and we will provide further clarification when this occurs.
Code of Conduct – determining amount and type of relief
Within the Code of Conduct, it provides key requirements when determining the amount and type of relief provided to a commercial tenant:
Rent relief must be proportionate to the reduction in the tenant’s trade during the COVID-19 pandemic period; and
At least 50% of the rent relief provided must be in the form of a waiver, with any balance being a deferral to be repaid over 24 months after the pandemic period.
Further requirements are detailed through the eleven ‘overarching principles’ and thirteen ‘leasing principles’ within the Code of Conduct. The following is an extract of the first six leasing principles which outlines how to determine the amount and type of relief to be provided:
Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period 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 fulfill their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
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.”
Over recent weeks we have been assisting both landlords and tenants to deal with the implications of the COVID-19 pandemic and specifically the impact on tenants’ ability to pay their rent. Many of our clients are seeking or have tenants seeking rent relief for commercial leases. To assist, ShineWing Australia has developed tools and resources for both landlords and tenants to navigate the application process and assessment of rent relief applications.
The state and territory governments are currently working to legislate the Code of Conduct separately. A number of practical matters remain unclear at the date of writing, including the following:
Will tenants and landlords be required to assess the proportion of rent relief on an ongoing basis or alternatively will the assessment be a once-off process, noting that the assessment should be consistent with that used for the tenant’s JobKeeper programme application?
Might any states or territories deviate from the code in the finalisation of their legislation?
What will the commencement date be in each state and territory, noting they have the discretion to determine any commencement date after April 3rd?
Will pre-agreed rent relief arrangements be subject to mandatory renegotiation?
Will there be any additional legislated relief for Landlords who are unable to meet their financial commitments as a result of being required to provide rent relief to their tenants?
How ShineWing Australia can help
If you are a landlord or tenant, please contact us for a complementary initial discussion to discuss your options and requirements with respect to determining rental relief under the Code of Conduct. Our financing specialists are also available to assist in requesting relief from your lenders.
Additionally, we can assist both landlords and tenants with determining eligibility for a range of Federal and State government economic recovery programmes. For more information on these packages, visit our dedicated COVID-19 webpage.