The Federal Government this week released its Code of Conduct for commercial landlords and tenants, with rent relief available for small businesses able to establish that revenue has dropped by 30 percent or more due to the impacts of Coronavirus regulations.
Businesses have to qualify for the Commonwealth Government’s JobKeeeper program to access what is called ‘a set of good faith leasing principles’.
‘The objective of the Code is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the Coronavirus period, whilst seeking to appropriately balance the interests of tenants and landlords,’ the Code preamble states.
Landlords have to will agree tailored and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis. Photo retailers and professional photography studios are being hit hard by the Coronavirus regulations and many photo industry businesses should qualify, providing they continue to employ their staff: ‘The Rent Relief Policy will include a mutual obligation requirement on the small and medium sized enterprises and not-for-profit tenants to continue to engage their employees through the JobKeeper initiative where eligible, and if applicable, provide rent relief to their subtenants,’ the Prime Minister stated on April 7.
Arrangements have to take into account the impact of the Coronavirus pandemic on the tenant, with specific regard to its revenue, expenses, and profitability; level of financial hardship; lease expiry date; and whether the tenant is in administration or receivership.
The Leasing Principles underlying the Code follow:
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…of up to 100 percent of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the Coronavirus pandemic period and a subsequent reasonable recovery period.
4. Rental waivers must constitute no less than 50 percent 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 fulfill 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 percent 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 Bankers Association’s Coronavirus 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 Coronavirus 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.
Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.
However. landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
Although imminent, it’s unclear exactly when the Code will come in to effect. While it was agreed by the National Cabinet on April 3, each state and territory has to implement it via legislation or regulation.
The Code of Conduct document concludes with some examples of how it could be applied:
– Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis, (ie, a 60 percent loss in turnover would result in a guaranteed 60 percent cash flow relief);
– At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen;
– Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties;
– If the tenant’s revenue has fallen by 100 percent, then at least 50 percent of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30 percent, then at least 15 percent of total cash flow relief is rent free/rent waiver and the remainder is rent deferral;
The Code document concludes with: ‘Care should be taken to ensure that any repayment of the
deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.
‘The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.’