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MANDATORY CODE FOR COMMERCIAL TENANCIES

Start With The End In Mind

The National Cabinet meeting with State Treasurers have agreed a mandatory code for commercial landlords and tenants will apply to tenancies where either the landlord or the tenant is eligible for the JobKeeper program. It will be legislated and regulated by each individual State and Territory.

It would appear this (temporary) mandatory code will only apply to tenancies where the landlord or tenant is eligible for the JobKeeper program and where they have a turnover of $50 million or less.

We have attached the complete Code of Conduct issued by National Cabinet and, as it is quite extensive, we are summarising the key points here:

  • The $50 million annual turnover threshold will be applied at the franchisee level, and at group level for large Retail Groups.
  • The Code will be run through each relevant state and territory legislation but the Code is not intended to supersede current legislation, but aims to complement it during the COVID-19 crisis period.
  • Landlords and tenants will negotiate in good faith.
  • All leases must be dealt with on a case-by-case basis, considering factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic.
  • Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
  • For tenants, failure to abide by the existing 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 (see below) of up to 100% of ordinary rent, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 period and a subsequent reasonable recovery period.
  • Rental waivers (not deferrals) must constitute no less than 50% of the total reduction in rent payable and regard must also be had to the Landlord’s financial ability to provide such waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
  • Later repayment of rental deferrals by the tenant must only be done over the balance of the lease term or a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
  • Landlords should seek to waive recovery of any other outgoings by a tenant, under lease terms, during the period the tenant is not able to trade.
  • No fees or interest should be applied with respect to rent waived and no fees or interest may be charged on deferrals of rent payable in the future.
  • Landlords must not draw on a tenant’s security for the non-payment of rent (bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic.
  • 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.
  • Where landlords and tenants cannot reach agreement on leasing COVID-19 arrangements the matter can be referred (by either party) to applicable state or territory commercial leasing dispute resolution processes for binding mediation. Landlords and tenants must not use mediation processes to prolong an amicable resolution.
  • SME tenants which are eligible for the JobKeeper payment are automatically considered to be in financial distress under this Code.
  • The rent relief is to be proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period, consistent the eligibility criteria of  the JobKeeper program, i.e. if business turnover is down 30% then it is expected the rent relief will be 30% or more. The rent relief would then be split 15% to a rent waiver and 15% to rent deferral.

There is much more detail in the full Code and we suspect the State mediation authorities could be overloaded in quick time given the complexity of meeting this temporary Code of Conduct in conjunction with existing State commercial tenancy laws and legally binding lease agreements.

Obviously, on a case-by-case basis, every rent relief agreement between separate landlords and tenants will differ and both parties could be in for a lot of work and documentation to negotiate their respective positions. It’s imperative that both the tenant and the landlord prepare their accounting records accurately and fairly to put forward their case, particularly if mediation is required.

MyAccountants cannot stress enough for commercial landlords and tenants to be fully prepared. Last week some 400,000+ businesses had registered for the JobKeeper program so it is certain 400,000+ tenants are likely to be requesting rent relief from their landlords.