The National Cabinet has recently released its Mandatory Code of Conduct (the Code) for landlords and commercial tenants in response to COVID-19. The Code comes into effect from 3 April 2020.
The purpose of the Code is to impose a set of “good faith leasing principles” to be applied in relation to existing commercial leasing arrangements between landlords and tenants that have suffered financial stress or hardship as a direct result of the COVID-19 pandemic.
The desired outcomes of the Code appear relatively simple: to preserve the landlord and tenant relationship, to keep the tenant in the property, and to preserve the lease that underpins the value of the property for the landlord. The Code seeks to achieve this through a “proportionate” and “measured” sharing of the financial risks and cashflow impacts between the parties throughout the duration of the pandemic while seeking to appropriately balance the interests of both landlords and tenants.
The Code is part of the Government’s “hibernation strategy” to preserve as much of the foundations and pillars of Australia’s economy during the pandemic as possible to enable the economy to rebuild and grow once hibernation comes to an end.
What are the eligibility requirements?
To Code will apply to commercial tenancies (including retail, office and industrial) where:
- the tenant is eligible for the Government’s JobKeeper program; and
- the tenants annual turnover is $50 million or less.
Broadly, a tenant will typically be eligible for the JobKeeper program where they are a business or not-for-profit (NFP) entity that employs staff and has experienced a reduction in turnover of at least 30% (or 15% for NFPs).
For more information on the JobKeeper program click here.
When tenants are evaluating their annual turnover, franchise businesses are assessed at the franchisee level, whereas retail corporate groups are assessed at the group level, rather than at the level of the individual retail outlet.
What kind of relief is available?
Under the Code, the landlord must offer the tenant a proportionate reduction in rent (the Rental Reduction) based on the reduction in the tenant’s trade and turnover during the pandemic period (and a subsequent reasonable recovery period).
The Rental Reduction is comprised of two components:
- rent waivers (rent-free period) which must account for at least 50% of the Rental Reduction provided to the tenant; and
- rent deferrals (delayed payment of rent) which must account for the remainder of the Rental Reduction, with the deferred component required to be paid over the greater of the remaining term of the lease, or a period of no less than 24 months.
Any amount of rent waiver is unable to be subsequently recouped by the landlord.
Manufacturing Pty Ltd (the tenant) carries on a medium sized business in a warehouse leased from Property Holdings Pty Ltd (the landlord). The lease has 5 years remaining and requires that the tenant pay $10,000 per month in rent. As a direct result of COVID-19, the tenants’ revenue has fallen by 40%.
Under the Code, the landlord will be required to provide an ongoing Rental Reduction equal to 40% of the monthly rent (ie 40% reduction x $10,000 monthly rent = $4,000 monthly Rental Reduction).
At a minimum, the landlord would be required to provide 50% of the Rental Reduction by way of a rent waiver (ie $2,000 per month) and the remaining 50% by way of a rent deferral (ie $2,000 per month).
The rent waiver amount is no longer required to be paid by the tenant. The rent deferral amount is to be paid by the tenant over the remaining term of the lease.
What are the landlords obligations under the Code?
Throughout the duration of the pandemic period and a subsequent reasonable recovery period:
- the landlord must not terminate the lease due to non-payment of rent;
- the landlord must offer the tenant a proportionate reduction in rent based on the reduction in the tenant’s trade and turnover during the pandemic period;
- the benefit of any reduction in statutory charges (such as land tax and council rates) or insurances received by the landlord must be passed on to the tenant in proportion with the Rental Reduction;
- the landlord should seek to share any benefit it receives due to deferral of loan payments with the tenant in proportion with the Rental Reduction;
- the landlord should seek to waive recovery of outgoings and other expenses where the tenant is unable to trade. In such circumstances, the landlord is entitled to cease or reduce such services (eg waste removal or security) as required;
- no fees, interest or other charges should be imposed by the landlord in relation to the rent waived or rent deferred;
- the landlord cannot draw on the tenant's security (bond, bank guarantee, etc) for the non-payment of rent during the relevant period;
- the tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or rent deferral period;
- the landlord must freeze any rent increases (turnover rent excluded);
- the landlord cannot impose prohibitions or levy penalties should tenants reduce their opening hours as a result of COVID-19.
What are the tenants obligations under the Code?
Notwithstanding that rent may be waived or deferred, the tenant must otherwise remain committed to the terms of the lease. The protections under the Code will not apply to tenants that fail to comply with other substantive terms of the lease.
How is the Code administered?
The Code will be given effect through legislation and regulations to be implemented by each state and territory as appropriate.
What obligations exist during negotiation?
Under the Code, landlords and tenants will be required to:
- discuss relevant issues;
- negotiate in good faith;
- act in an open, honest and transparent manner;
- provide the other party with sufficient and accurate information (such as financial records) to help substantiate the financial impact of COVID-19;
- assist each other in their respective dealings with other stakeholders such as governments; utility companies, and banks;
- consider each lease on a case-by-case basis.
What happens if an agreement cannot be reached?
Where landlords and tenants cannot reach an agreement on their leasing arrangements, the matter will be referred to a dispute resolution process for binding mediation.
Both local and international banks operating in Australia will need to come to the party to support the arrangements agreed between the landlord and tenant.
How can RSM help?
If you require assistance in determining your eligibility, negotiating your lease, modelling the financial impact on your business, or planning and implementing strategies to protect and preserve your business and investments, our specialist advisers are here to help. Contact your local RSM adviser today.
All material contained in this document is provided as general commentary only. No material should be accepted as authoritative advice and anyone wishing to act upon the material contained in this document should first contact RSM for properly considered professional advice, which takes into account specific facts and circumstances.