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NATIONAL CABINET MANDATORY CODE OF CONDUCT (“CODE”)
SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19 (Last updated 7 April 2020)

On 7 April 2020, The Hon Scott Morrison announced a set of “good faith leasing principles for application to commercial tenancies” and “to aid the management of cashflow for SME tenants and landlords on a proportionate basis” through the implementation of the National Cabinet Mandatory Code of Conduct – SME commercial leasing principles during COVID-19.

Unlike other COVID-19 measures previously announced by Mr Morrison, the Code is generally not prescriptive in nature and more principle-based. This is highlighted in Appendix I:
“…the circumstance of each landlord, SME tenant and lease are different, and are subject to negotiation and agreement in good faith”.

Timeframe

  1. The exact commencement date has not been set. That date may be different in each state and territory but will be a date following 3 April 2020 (though it is reasonable to believe it will be soon after that date).
  2.  The end date is subject to change as it is for the period during which the JobKeeper Payment program remains operational.

The Code is only accessible to a tenant that is both:

  • a commercial tenant: including that of retail, office and industrial premises (it does not apply to residential tenancies); and
  • an SME tenant: being eligible for the JobKeeper Payment program, having an annual turnover of up to $50 million. The annual turnover threshold will be applied in respect of:
    • ­franchises at the franchisee level ­
    • retail corporate groups at the group level (rather than at the individual retail outlet level)

The objective of the Code is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords. It does this by setting out a number of Overarching Principles.

Furthermore, in negotiating and enacting appropriate temporary arrangements under the Code, the Leasing Principles should be applied as soon as practicable on a case-by-case basis.

The detailed Overarching Principles and Leasing Principles can be found here.

If the tenant can access the Code, what should they expect from their landlord:

  • must not terminate the lease due to non-payment of rent during the COVID 19 pandemic period (or reasonable subsequent recovery period – note this latter term is undefined at this time).
  • must offer the tenant a proportionate reduction in rent payable in the form of a waiver and deferrals 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.
    •  the rental waiver must constitute no less than 50% of the total reduction in rent payable 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.
    •  no fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferrals.
  • must amortise the payment of the rental deferral by the tenant 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. Further no fees, charges nor punitive interest may be charged on deferrals.
  • must pass on any reduction in statutory charges (e.g. land tax, council rates) or insurance to the tenant in the appropriate proportion applicable under the terms of the lease.
  • 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 COVID-19 response, or any other case-by-case deferral of loan repayments offered to other landlords, with the tenant in a proportionate manner.
  • where appropriate, should 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.
  • Negotiated arrangements necessitating repayment should occur over an extended period. no repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, taking into account a reasonable subsequent recovery period.
  • 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.
  • should permit the tenant to be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period. 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.
  • agrees 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.
  • may not apply any prohibition on levy any penalties if the tenant reduces opening hours or cease to trade due to the COVID-19 pandemic.

Examples of the above are set out in Appendix I (page 7 of the code), again noting “the circumstance of each landlord, SME tenant and lease are different, and are subject to negotiation and agreement in good faith”.

But what should their landlord expect from the tenant accessing the code:

  • 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.
  • must also have regard to the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
  • understands that the landlord reserves the right to reduce services where the landlord waives recovery of any other expense (or outgoing payable), under lease terms, during the period the tenant is not able to trade.

What happens if the tenant and landlord cannot agree (as a direct result of the COVID-19 pandemic):

  • the matter should be referred for, and subjected to, binding mediation.
  • noting tenants and landlords must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.

Please contact TNR if you have any queries related to above information.

Important: The information contained in this post / article is not advice. Readers should not act solely on the basis of material contained in this post. Items herein are general comments only and do not constitute or convey advice per se. We recommend that our formal advice be sought before acting on anything contained in this post.