Written by Yvonne Furfaro & Kyle Rowston-Wolcott.
A new Code of Conduct has imposed a set of good faith leasing principles that aim to protect tenants who are eligible for the Commonwealth Government’s JobKeeper programme.
The Code of Conduct (‘the Code’) aims to assist small to medium sized commercial tenants who expect a significant reduction in turnover due to COVID-19.
To be eligible a commercial tenant must:
- Have an annual turnover of no more than $50 million; and
- For franchises, this will be assessed at the franchisee level
- For corporate groups, this will be assessed at the group level (and not by individual retail outlet)
- Be an eligible business for JobKeeper, which requires a business to demonstrate that turnover will be reduced by more than 30% relative to a comparable period (of at least one month) last year.
The Code applies to all eligible tenants ( ‘SME tenants’) and requires that negotiations should take place between both SME tenants and landlords to “share, in a proportionate, measured manner, the financial risk and cashflow impact” caused during the COVID-19 period. This period has been defined by the operational period of the JobKeeper programme, which is in effect for a maximum of 6 months from 30 March 2020. However, it has been recommended that the Code should apply “in spirit” to all leasing arrangements for affected businesses, which might extend beyond the 6 month period.
The Code is encouraging good faith negotiations that acknowledge the specific impacts of COVID-19 and provide a case-by-case solution for each SME tenant’s circumstances. The general goal of the Code is to avoid mass insolvency at the tenant level, which would ultimately leave landlords at a disadvantage and slow economic recovery after the COVID-19 period.
A full copy of the Code may be found here, while an explanation of the principles is provided below.
- 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 the amendments made under the Code). Please note, a failure to abide by the substantive terms of the lease will forfeit protection under the Code.
- Landlords must offer rent reductions in the form of waivers and deferrals based proportionately (up to 100%) on the reduction to the tenant’s trade during this period and a reasonable recovery period.
- Reasonable recovery is left to the parties to negotiate in good faith but should be consistent with assessments made by the JobKeeper programme.
- When applying principle #3, at least 50% of the rent reductions made by the Landlord should be in the form of waivers (as opposed to deferrals). If a tenant would be unable to fulfill their ongoing obligations with 50% of the reductions as waivers, further waivers should be offered having regard to the financial ability of the Landlord as well. Tenants may waive their right to the 50% waiver minimum.
- Deferred rental payments must be amortised for at least 24 months or over the balance of the lease term, whichever is greater.
- This is the default position; however, the parties may agree to another time frame instead.
- Amortisation in this instance refers to the gradual reduction of a debt through regular payments (a payment plan essentially) over at least 24 months.
- Any reductions in statutory charges (e.g. land tax, council rates) or insurance must be passed on to the tenant in the appropriate proportion under the terms of the lease.
- Landlords should share any benefits they receive from loan deferrals provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral proportionately with tenants. The proportions used should relate to the reduction in trade experienced by the tenants.
- Landlords should seek to waive the recovery of any other expense (or outgoing) during the period that a tenant is unable to trade. This is a right reserved for Landlords to exercise when they deem it appropriate in the circumstances.
- If the negotiated arrangements under the Code still require repayment, this should be spread out over an extended period to avoid an undue financial burden on the tenant.
- Repayment should not commence until either the lease has expired or the Government has announced the end of the COVID-19 pandemic, whichever is earlier.
- A reasonable subsequent recovery period should also be taken into account.
- Rental waivers should not have any fees, interest or other charges attached to them. Similarly, deferrals should not have any fees, charges nor punitive interest. Deferrals will still be allowed some interest, but it will likely need to be in line with current standards.
- 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.
- The tenant should be given an opportunity to extend its lease for at least as long as the period given for rental waivers and deferrals. This is intended to allow the tenant additional time to trade under the existing lease terms during the recovery period.
- Landlords must 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. This will take effect regardless of any arrangements between the landlord and the tenant.
- Landlords must not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
Is It Legally Binding?
At the moment this is still a recommended mandatory code, which lacks legal force. However, the Government does plan to give legal force to these principles by implementing similar Codes through relevant state and territory legislation. These will exist alongside the existing laws and will likely provide a complimentary position rather than superseding existing rules.
What If Negotiations Fail?
Should landlords and tenants fail to reach an agreement on leasing arrangements (as a direct result of COVID-19), the matter must be referred and subjected to a retail/commercial leasing dispute resolution process. This will impose a binding mediation outcome and may result in large delays due to the COVID-19 pandemic disrupting normal processes. Importantly, these negotiations must only concern issues related directly to COVID-19 and any attempt to rely on these principles for non-COVID-19 related matters will likely fail and may result in penalties (once the legislation is enacted).
The contents are for informational purposes only and do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such.
Uther Webster & Evans can provide you with advice and assist you with your commercial and personal affairs call or email us to discuss.