The National Cabinet has agreed to a mandatory code of conduct for commercial tenancies. The code will be guided by a set of principles, developed and legislated by State and Territory governments and apply to commercial landlords including SMSFs.
Tenants who participate in the federal government’s JobKeeper assistance and have a turnover of less than $50 million will be protected by the code.
Mandatory Code of Conduct for commercial tenancies
Landlords must reduce rents in proportion to the losses to their tenant’s business, and waivers must be at least 50 per cent of the reduction in turnover. They are also banned from terminating a lease or drawing on tenants’ securities. Tenants must honour their lease.
Source: Financial Review 07/04/2020
Skip to the Code of Conduct
What the Code of Conduct for commercial leasing includes
Summary of principles that guide the code will be as follows:
- Where it can, rent should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome
- There will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between landlords and tenants
- There will be a prohibition on termination of leases for non-payment of rent (lockouts and eviction)
- There will be a freeze on rent increases (except for turnover leases)
- There will be a prohibition on penalties for tenants who stop trading or reduce opening hours
- There will be a prohibition on landlords passing land tax to tenants (if not already legislated)
- There will be a prohibition on landlords charging interest on unpaid rent
- There will be a prohibition on landlords from making a claim to a bank guarantee or security deposit for non-payment of rent
- Ensure that any legislative barriers or administrative hurdles to lease extensions are removed (so that a tenant and landlord could agree a rent waiver in return for a lease extension)
What the PM has said
#BREAKING: Prime Minister Scott Morrison has outlined a pending 'code of practice' for commercial tenants and landlords to follow during the #coronavirus pandemic. Updates: http://9Soci.al/IglY30quUNP#9News
Posted by 9 News Sydney on Thursday, April 2, 2020
“What is important as part of this code is that both parties negotiate in good faith, that there is a proportionality principle that needs to be in this code,” said Prime Minister Scott Morrison. “And that proportionality principle is simply this, that the turnover reduction of the tenant needs to be reflected in the rental waiver of the landlord.
How that is done inside the lease is up to the landlord and the tenant. There are many different ways you can achieve this. If, for example, there was a three or six-month rental waiver because a lessee, a tenant would have had to closed their doors and there is simply no money coming in, one way to achieve that is to extend the overall lease by six months on the other side if they’re going to give a rental waiver. Similarly, they could agree to a different amount of the lease for the period of time. These are things we do not wish to be prescriptive about.”
How should an SMSF landlord determine if a tenant has experienced a reduction in business turnover?
In order to obtain rent relief, tenants will need to be willing to “open their books” to the landlord to demonstrate a reduction in business turnover.
Landlords should ask for relevant information which allows the tenant to demonstrate how their circumstances have changed as a result of COVID-19, with comparative data for pre and post 1 March 2020.
Such information might include:
- evidence that the business is eligible for the “JobKeeper” assistance and has a turnover of less than $50 million (in which case the mandatory code will apply);
- a statement of financial position, outlining income, expenses, assets and liabilities (preferably audited or certified by a chartered accountant), currently and pre-1 March 2020;
- year to date and recent financial year financial statements for the impacted location, and guarantor entity:
- P&L or Income Statement;
- Balance Sheet;
- report from an accountant or financial adviser with evidence that the business has experienced a substantial reduction in its ability to pay rent due to the impacts of COVID-19;
- summary of major debt obligations and whether any repayment holidays has been offered by the financier;
- other relevant information depending on the nature of the business, for instance, evidence of a decline in sales or loss of clients/projects and the consequential anticipated turnover for the current quarter, which shows how circumstances have changed as a result of COVID-19 since 1 March 2020;
- what arrangements are currently in place for the ongoing operation of the business, such as work from home arrangements and whether staff have been stood down; and
- whether the tenant holds business interruption insurance that covers the payment of rent and outgoings and if the circumstances for a claim on that insurance have been triggered.
Tenants seeking rent relief will need to be able to justify the relief sought with reference to this information so that the relief is proportionate and reasonable. Tenants who are transparent and provide compelling information are more likely to be persuasive in their claim for rent relief.
Source: Lexology 06/04/2020
Questions SMSF landlords should ask when providing rent relief to commercial tenants
- Will there be a rent free period or merely a rent reduction?
- Will the abatement apply to other costs like outgoings and cleaning charges or only rent? In relation to outgoings, where the mandatory code of conduct applies, there will be a prohibition on landlords passing land tax to tenants (if not already legislated against).
- Will there be any circumstances for the unpaid rent to be recouped, for instance, will there be a subsequent repayment plan or if the tenant is subsequently in default?
- Will there be any changes to the way in which any existing incentive may be applied?
- Will there be any consequential permanent changes to the lease? For example:
- an extension of the term;
- an increase in bank guarantee or provision of corporate or personal guarantees, which would needed to be documented in a formal registered variation of lease; or
- a change to the rent review mechanism.
- If rent payments are deferred rather than waived, will the unpaid rent component bear interest? The right to interest will not apply in circumstances where the arrangements are governed by the mandatory code of conduct.
- Are there any other conditions attached to the rent relief, such as participation in the “JobKeeper” program or other government assistance?
- If insurance proceeds or government assistance become available, will the tenant be required to use those funds to repay the unpaid rent?
- How long will the arrangement be in place for?
- Is there scope to review the arrangement and in what circumstances?
- Will there a relaxation of other lease obligations, such as an obligation to keep trading? In this regard, arrangements governed by the mandatory code of conduct will have protections for tenants who stop trading or reduce opening hours.
The rent relief agreement should be formally documented. Any permanent changes to the lease (such as an extension of the term) will need to be documented by way of a variation of lease, which can be registered on title if the lease is registered or required to be registered.
Source: Clayton Utz 06/04/2020
SMSFs and Rent Relief to Commercial Tenants
Where the commercial tenant is a related party of an SMSF landlord, additional rules apply: SMSF Rent Relief for Related Party Tenants
It will be possible for an SMSF landlord to provide rent relief (such as a rent free period) under their lease agreement provided the SMSF can establish it is in the best interests of the SMSF. The specific adjustments to the rental agreement between the SMSF and the related party business tenant will depend on:
- the circumstances of each business tenant, including its cash flow, operations and the restrictions imposed by COVID-19
- the terms of the existing lease
- the property the subject of the lease, including its location and the ability for it to be leased to another tenant
- comparative rent relief (and other incentives) being offered by arm’s length landlords.
Because of the seriousness of the SIS Act compliance risks, obtaining sufficient evidence to justify the rent relief (or other incentive) will be vital. It is also essential the new arrangement is properly documented.
It’s extremely important that SMSF trustees document and provide evidence of their decisions to provide their related party business SMSF rent relief as this will be utilised by the independent auditors of the fund to determine whether the SMSF rent relief is appropriate and at arms-length for the situation.
Legal advice on commercial tenancies and the Code of Conduct
Stone Group Lawyers have identified a number of different areas where they can assist both landlords and tenants to comply with the Code of Conduct principals and generally.
Whilst not an exhaustive list, the following are areas where Stone Group may be able to assist with their leases and to mitigate the worst possible effects during the COVID-19 declared emergency.
Advice for Landlords:
- Advice on rights and entitlements with respect to the lease terms, including any Force Majeure clause, and the effect of the Code of Conduct soon to be legislated by the Government with respect to temporary rent and/or other relief due to the impact of COVID-19, and the other options that may be available.
- Assessment to determine whether a claim for rent relief by a tenant has genuine grounds of financial hardship, or may otherwise amount to an anticipatory breach or repudiation.
- Preparation of Deed or Agreement / Deed of Variation / Form 13 Amendment for execution, with respect to any agreement reached.
- Appearance, representation and submissions at mediation, or other resolution process, with the tenant.
- Assistance to obtain assistance from the landlord’s bank or lender, where the tenant may be entitled to temporary rent relief.
- Advice on the availability of business interruption insurance, and claim preparation.
Advice for Tenants:
- Advice on the availability of rent relief, and other options available, and the necessary steps to be taken.
- Preparation of formal notification to be given to the landlord.
- Gathering and presentation of evidence in support of a claim for rent relief, including where necessary from an accountant or financial adviser.
- Advice on rights and entitlements with respect to any Force Majeure clause.
- Appearance, representation and submissions at mediation, or other resolution process, with the landlord.
- Advice on the availability of Government assistance and the necessary steps to be taken.
- Preparation of appropriate responses to formal notices that may be received from the landlord, and any Deed or Agreement that may be proposed by the landlord.
- Advice on the availability of business interruption insurance, and claim preparation.
Advice for both Landlords and Tenants:
Where both the Landlord and Tenant agree, we can:
- Act as the mediator between them to assist reach a mutually agreeable resolution, including preparation of a written agreement for execution where agreement is reached.
- Act as arbitrator to provide a determination (with written reasons) of an issue between them which they are unable to resolve themselves.
- Provide an independent view (with written reasons) as to the just, fair and equitable position to which they should each agree, having regard to the terms of the lease and their individual circumstances, rights, entitlements and interests, and given the impact and uncertainties of COVID-19.
Stone Group is offering a free 30 minute consult to new clients which can be used to identify where they can assist in their leasing matter (or any matter). Click the Stone Group Lawyers logo below to visit their website and book a complimentary consultation where you can obtain some preliminary general advice:
Nation Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19
The purpose of this Code of Conduct (“the Code”) is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.
These principles will apply to negotiating amendments in good faith to existing leasing arrangements – to aid the management of cashflow for SME tenants and landlords on a proportionate basis – as a result of the impact and commercial disruption caused by the economic impacts of industry and government responses to the declared Coronavirus (“COVID-19”) pandemic.
This 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 (herein referred to as “SME tenants”).
The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).
The Parties to this Code concur that during the COVID-19 pandemic period, as defined by the period during which the JobKeeper programme is operational, the principles of this Code should nevertheless apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.
Appendix I gives examples of proportionate solutions that may be agreed under this Code, and forms part of the overall Code.
The Code has been developed to enable both a consistent national approach and timely, efficient application given the rapid and severe commercial impact of official responses to the COVID-19 pandemic.
PARTIES TO THE CODE
The Code will be given effect through relevant state and territory legislation or regulation as appropriate. The Code is not intended to supersede such legislation, but aims to complement it during the COVID-19 crisis period.
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 is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis.
The following overarching principles of this Code will apply in guiding such arrangements:
- Landlords and tenants share a common interest in working together, to ensure business continuity, and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during a reasonable recovery period.
- Landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes.
- Landlords and tenants will negotiate in good faith.
- Landlords and tenants will act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with this Code.
- Any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period.
- The Parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of this Code.
- All premises are different, as are their commercial arrangements; it is therefore not possible to form a collective industry position. All parties recognise the intended application, legal constraints and spirit of the Competition and Consumer Act 2010.
- The Parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under this Code.
- All leases must be dealt with on a case-by-case basis, considering factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic; whether the tenant’s lease has expired or is soon to expire; and whether the tenant is in administration or receivership.
- Leases have different structures, different periods of tenure, and different mechanisms for determining rent. Leases may already be in arrears. Leases may already have expired and be in “hold-over.” These factors should also be taken into account in formulating any temporary arrangements in line with this Code.
- As the objective of this Code is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership, and the application of the Code modified accordingly.
In negotiating and enacting appropriate temporary arrangements under this Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis:
- 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 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.
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) 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.
- Rental waivers must constitute no less than 50% 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 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 may waive the requirement for a 50% minimum waiver by agreement.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 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.
- 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.
- 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 COVID-19 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.
Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
The following definitions are provided for reference in the application of this Code.
- Financial Stress or Hardship: an individual, business or company’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) that causes the tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments. SME tenants which are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under this Code.
- Sufficient and accurate information: this includes information generated from an accounting system, and information provided to and/or received from a financial institution, that impacts the timeliness of the Parties making decisions with regard to the financial stress caused as a direct result of the COVID-19 event.
- Waiver and deferral: any reference to waiver and deferral may also be interpreted to include other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), or any other such commercial outcome of agreements reached between the parties. Any amount of reduction provided by a waiver may not be recouped by the Landlord over the term of the lease.
- Proportionate: the amount of rent relief proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period, consistent with assessments undertaken for eligibility for the Commonwealth’s JobKeeper programme.
This Code comes into effect in all states and territories from a date following 3 April 2020 (being the date that National Cabinet agreed to a set of principles to guide the Code to govern commercial tenancies as affected by the COVID-19 pandemic) to be defined by each jurisdiction, for the period during which the Commonwealth JobKeeper program remains operational.
EXAMPLES OF THE APPLICATION OF THE PRINCIPLE OF PROPORTIONALITY
The following scenarios are examples only, noting the circumstance of each landlord, SME tenant and lease are different, and are subject to negotiation and agreement in good faith.
Examples of practical variations reflecting the application of the principle of proportionality may include, but are not limited to:
- Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis
- i.e. a 60% loss in turnover would result in a guaranteed 60% 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:
- So if the tenant’s revenue has fallen by 100%, then at least 50% 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%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.
- 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.