Commercial Leasing Principles
How the new Leasing Code of Conduct will work
I thought it would be useful to prepare a summary of what will be covered when the Australian States and Territories legislate to give effect to the National Cabinet Mandatory Code Of Conduct - SME Commercial Leasing Principles During Covid-19 (“the Code “).
The Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million.
The idea is that Landlords and Tenants negotiate in good faith and enact appropriate temporary arrangements.
The following leasing principles should be applied as soon as practicable on a case-by-case basis:
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 with their landlord. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code. In other words – if you agree a reduced rent you must pay the reduced amount otherwise your Landlord can terminate your lease.
3. Landlords must offer tenants proportionate reductions in rent payable (in the form of waivers and deferrals) of up to 100% of the amount ordinarily payable, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
4. Rental waivers must:
constitute no less than 50% of the total reduction in rent payable (in the form of waivers and deferrals) 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.
Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants can waive the requirement for a 50% minimum waiver by agreement if they choose to do so.
5. Payment of rental deferrals by the tenant must be repaid 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 must be passed on to the tenant in the appropriate proportion applicable under the terms of the lease. In line with the tenant’s proportion of total outgoings.
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 COVID-19 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 expenses (or outgoings payable) by a tenant, under the 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 the negotiated arrangements 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 and no fees, charges nor punitive interest may be charged on deferrals.
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 COVID-19 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 agreed 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.
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 or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
If you are an eligible tenant, you need to contact your landlord as soon as possible and start the negotiation process. Please call or email me if you need assistance with this.