On Tuesday afternoon this week the National Cabinet released a ‘Mandatory Code of Conduct : SME Commercial Leasing Principles during COVID-19’ that confirms arrangements for commercial leases during COVID -19 aimed at small and medium businesses.
The Code has been introduced in a bid to prevent further damage to business viability for landlords and tenants following the COVID-19 pandemic by imposing a set of good faith leasing principles for commercial tenancies.
The Code sets out principles to negotiate amendments to leases to aid the management of cashflow for tenants and landlords on a proportionate basis for tenants that are suffering financial stress or hardship as a result of the COVID-19 pandemic.
The Code will be given effect through State and Territory legislation and regulation in the near future and will apply for the period that the Commonwealth JobKeeper program remains in operation.
Who does the Code apply to ?
The Code applies to commercial leases (including retail, office and industrial) where a tenant qualifies by:
- Having an annual revenue of less than $50 million;
- Being eligible for the JobKeeper program; and
- Confirming the principles that will apply to the commercial tenancy.
In addition to the above, the Code also states that it should apply in spirit to all leasing arrangements of affected businesses.
The Code sets out some overarching principles that require the landlord and tenant to work together to allow for business to recommence at the end of the COVID-19 pandemic.
The key principles:
- acknowledge that every lease needs to be dealt with on a case by case basis;
- require discussions between the landlord and the tenant to achieve temporary leasing arrangements, working mutually towards a satisfactory outcome;
- require landlords and tenants to assist each other in dealing with other stakeholders, banks and utility providers;
- require good faith negotiation, honesty and transparency; and
- require the commercial position of each party to be recognised.
The above is a summary and not exhaustive and the Code should be considered in each case.
The Code also sets out specific leasing principles that are to be applied on a case by case basis which include:
- Tenants must:
- remain contractually bound and committed to their lease, subject to any amendments negotiated under the Code (with tenants having to remain committed to the renegotiated terms under the Code or risk forfeiting the protection of the Code);
- meet any deferred rental payment amortised over the greater of the remaining lease or a period of 24 months, unless otherwise agreed and no repayment is to commence until the COVID -19 pandemic ends or the existing lease expired, whichever is the earlier;
- Landlords must:
- Not terminate the lease due to non-payment of rent during the COVID-19 pandemic or a reasonable recovery period thereafter;
- Not draw on tenants security (security bond, bank guarantee or personal guarantee);
- Freeze rent increases (excluding retail leases based on turnover rent);
- Reduce rent proportionately to the trading reduction in the tenants business either by a waiver of rent OR deferring of rent;
- Not penalise tenants who reduce trading hours or shutdown altogether as a result of COVID- 19 restrictions on trade;
- Not charge the tenant any fees, charges or interest on unpaid rent;
- Pass onto the tenant any reduction in statutory charges or insurance in the appropriate proportion; and
- Provide the tenant with an opportunity to extend the lease for an equivalent period of the rent waiver and/or deferral period.
The Prime Minister has reiterated an urge for landlords and tenants to communicate to navigate implementation of the above principles in order to reach mutually satisfactory outcomes.
The arrangements will be overseen by a binding mediation in the event that landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic).
Where to now for Tenants and Landlords?
For tenants these measures will come as a relief if they are suffering financial hardship as a result of COVID-19, however for some tenants the Code may not be enough. It is critical for tenants to approach their landlords as soon as they can about a commercial compromise.
For landlords they need to familiarise themselves with the requirements of the Code and negotiate in good faith with their tenants having regard to the principles set out in the Code. Careful consideration should be given to approaching financiers to secure any appropriate financial relief.
These are difficult times for landlords and tenants alike and the rapidly changing legal landscape adds another layer of complexity to this.
The key message from the Prime Minister is for all parties to communicate and work towards a solution which will support continuity of business after the crisis. Ensuring commercial leases can survive this difficult period will benefit both landlords and tenants in the long run.
It is important that legal advice is sort and that proper documentation by way of deed or a lease variation in respect of any agreement reached is put into place.
If you would like more information on the above or require assistance in relation to the impact of COVID-19 on commercial tenancies please call Natasha Hemmerling or Kaviytha Raman on (08) 8333 2130
This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you. Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.