Purpose of the Code
The purpose of the Code is to:
- establish good faith leasing principles which will apply to commercial tenancies (retail, office and industrial); and
- establish and allocate a proportionate and measured burden between the parties to commercial leases.
The Code is mandatory and expected to be legislated and enforced by the States and Territories in the coming days.
Does the Code apply to my lease?
The Code will apply to all SME tenancies that are suffering “financial stress or hardship” as a result of the COVID‑19 pandemic, where the tenant:
- is eligible for the Government’s JobKeeper programme; and
- has an annual turnover of up to $50 million, (referred to as SME tenants).
Financial stress or hardship is where, as a direct result of the COVID-19 pandemic, a tenant’s business is not able to generate sufficient revenue to meet its financial and/or contractual commitments.
Note: SME tenants who are eligible for the JobKeeper payment are automatically subject to the Code (regardless of whether the SME tenants receive JobKeeper payments).
What if the Code doesn’t apply to my lease?
In cases where the Code doesn’t apply (i.e. because the tenant doesn’t satisfy the criteria for being a SME tenant), the Code implores parties to all leasing arrangements to apply the principles of the Code “in spirit”. In other words, the Federal Government is actively encouraging all commercial landlords and tenants to buy into the spirit of the Code and adopt it as a framework for negotiating fair, reasonable and proportionate arrangements which will assist landlords and tenants to ride out the challenging economic conditions.
How long will the Code apply for?
The Code applies from a date after 3 April 2020 (to be defined by each jurisdiction) for the period during which the JobKeeper programme is operational (i.e. until the end of the pandemic period). The JobKeeper programme is currently in place for 6 months, subject to any extension or reduction mandated by the Government.
It is widely expected that the Code will be extended contemporaneously with an extension to the JobKeeper programme.
Overarching principles vs leasing principles
The Code distinguishes between:
- ‘overarching principles’: the parties have an obligation to negotiate in good faith and act in an ‘open, honest and transparent manner’. Parties must also provide each other with sufficient and accurate information during these negotiations; and
- ‘leasing principles’: the Code sets out 14 leasing principles that should be applied as soon as practicable on a case-by-case basis. The key principles are set out below:
- 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 for the pandemic period and subsequent recovery period. Rental waivers must constitute at least 50% of the total rent reduction.
- Landlords must pass on relief – The Landlord must pass on any reduction it receives in statutory charges (i.e. land tax and council rates). If the landlord receives any benefit from it’s financier (i.e. deferral of mortgage repayments) this should be shared with the tenant in a proportionate manner.
- 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).
- Repayment terms – if part of the rent reduction agreed is a deferred rent, then the deferred component must be amortised over the balance of the lease term or 24 months (whichever is greater). This requirement can be waived by mutual agreement.
- Lease extensions– Landlords should allow tenants to extend the lease for the period the subject of the rent deferral.
- No rent increases – Landlords must suspend rent increases for the duration of the COVID-19 pandemic period and a reasonable recovery period after it passes.
A working example
A tenant (being a SME tenant) seeks rental relief from its Landlord on the basis it has experienced a 60% downturn in revenue since 1 March 2020, as a result of COVID-19. The tenant’s usual annual revenue is $3 million. The tenant provides sufficient and accurate information prepared by its accountant to support its position. The lease is therefore subject to the mandatory code.
In accordance with the Code, the landlord and the tenant agree to the following:
- 30% waiver of rent during the pandemic period and for 2 months following the end of that period (Relief Period);
- 30% deferred rent to be repaid over the remaining four years of the lease term, with repayment obligations commencing after the expiry of the Relief Period;
- the tenant will continue to pay 40% of the rent during the Relief Period;
- the landlord will not terminate the lease due to non-payment of rent or call on the bank guarantee during the Relief Period; and
- a fixed rent increase which was scheduled to take place on 1 August will not occur if it falls within the Relief Period.
This agreement complies with the Code because:
- the total cash flow relief is proportionate to the tenant’s loss in revenue;
- at least half the rent relief is in the form of a rent waiver with the remainder as a rent deferral;
- the landlord is prohibited from terminating the lease and calling on security during the Relief Period; and
- the landlord will not undertake the scheduled rent review during the Relief Period.
Waiver and deferral – what’s the difference?
A rent waiver is a rent-free period. The landlord ‘waives’ completely the tenant’s obligation to pay rent for that period and the rent will not be paid by the tenant.
A rent deferral is when rent is required to be paid at a later date.
In the Code, ‘waiver and deferral’ includes other forms of agreed variations to existing leases, such as pausing or hibernating the lease.
What if the parties cannot agree?
If negotiations guided by the Code’s principles are unsuccessful, the matter should be referred and subjected to the applicable State or Territory retail/commercial leasing dispute resolution processes for binding mediation.
The full implications of the Code will be known in the coming days/weeks, once the Code is implemented through State and Territory legislation and regulation. In the meantime, parties should start talking and sharing financial information now, to commence negotiations for appropriate rent relief in-line with the principles set out in the Code.
It is critical that any negotiated agreement for relief is documented appropriately by a lawyer. If you are unsure whether the Code applies to your lease or if you would like assistance interpreting the Code and its application, please contact us.