8 April 2020
With effect from 3 April 2020, the National Cabinet has issued its principles intended to balance the interest of landlords and tenant in a lease involving SME tenants (being those tenants with a turnover below $50 million) (referred to as ‘the Code’). The basis of the Code remains for Landlords and Tenants to negotiate mutually acceptable arrangements that work through their particular circumstances. The negotiations are intended to be open, honest and transparent with a view to reaching a temporary change to the leasing arrangements that takes into account the impact of COVID-19 on the Tenant proportionately (including addressing a recovery period) and the circumstances of the Lease.
The Code is intended to apply to all tenant businesses that are eligible for the Commonwealth Government’s Jobkeeper Programme and are SME Tenants with turnover below $50 million. The criteria for the JobKeeper Programme are those businesses with either:
- A turnover of less than $1 billion who have (or will have) their turnover fall by 30% or more; or
- A turnover of more than $1 billion who have (or will have) their turnover fall by 50% or more.
Note that where a consolidated reporting group has a turnover of less than $1 billion, then each business within that group can be considered separately for the purposes of this criteria. Note also that charities registered with the Australian Charities and Not-for-Profit Commission would also be considered eligible if they have (or will have) their turnover fall by 15%.
In negotiating temporary lease arrangements under the Code, the government has directed that the following principles should be applied on a case by case basis and as soon as practicable:
1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
2. 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.
3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (a waiver being the Landlord granting a whole or partial rent free component and a deferral being the Landlord deferring payment or all or part of the rent to a later date in line with the Code) 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.
4. 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 fulfil 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.
5. 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.
6. 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.
7. 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 Banking 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.
8. 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.
9. If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
What if you can’t agree?
If the parties cannot agree, then the Code allows for the dispute to be referred to the Office of the Small Business Commissioner for mediation (in Victoria, the Victorian Small Business Commission is the relevant body). Note that mediation is not intended to delay a resolution.
You should be aware that the Lease remains binding between Landlord and Tenant, with any agreed changes intended to be operative as a temporary variation of Lease. The Code gives parties a level of clarity to guide their commencing or proceeding with negotiations on addressing the impact of COVID-19. However, National Cabinet still expects that parties reach agreement on terms that will work in their individual circumstances.
As such, it would be best for both Landlord and Tenant to engage transparently in terms of the impact of COVID-19 on each of their businesses (even in circumstances where the Lease does not require a Tenant to provide turnover figures) with clear reference to the turnover impacts and any other COVID-19 policy benefits (e.g. bank repayment breaks or statutory cost reductions) that impact the commercial position. The Code sets out guidelines for deferrals and waivers of rent, so it is clearly intended that the Landlord must forgo some rent in resolving any agreement that preserves the Tenant’s business for the benefit of both parties.
The Full Mandatory Code can be found at the following: https://www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf
How can Sharrock Pitman Legal assisit?
Should you have any questions on how the Code may impact you or need assistance in negotiating your position in a Lease, please contact us on (03) 9560 2922.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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For further information contact
Andre is a Principal of Sharrock Pitman Legal.
He heads our Property Law Group and is an Accredited Specialist in Property Law (accredited by the Law Institute of Victoria). He also deals with Commercial Law. For further information, contact Andre Ong on his direct line (03) 8561 3317.