The government released the National Cabinet Mandatory Code of Conduct (Code) outlining principles that apply to negotiating amendments to existing lease arrangements for ‘SME Commercial tenants’ suffering ‘financial stress or hardship’ during the COVID-19 pandemic period.
SME Tenants are tenants with an annual turnover of $50 million or less that are eligible for the governments JobKeeper programme. The COVID-19 pandemic period is the period in which the JobKeeper programme is operational (Pandemic Period).
The Code prescribes the following key principles during the pandemic period:
- Landlord’s must offer commercial tenants proportionate reductions 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 Pandemic Period;
- Rental waivers must constitute no less than 50% of the total reduction in the rent payable under the above principle over the Pandemic Period. 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 greater, unless otherwise agreed by the parties; and
- Any reduction in statutory charges or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease;
*To be clear, rent waivers are not to be repaid or amortised. It is effectively a credit note against rent otherwise payable.
Financial stress or hardship is defined as the 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 commitments (including lease commitments). It may be arguable that a tenant is not suffering ‘financial stress or hardship’ if for example the government-mandated restriction on the tenant’s industry is lifted even if the tenant is still eligible for JobKeeper.
What else does the Code prescribed for Tenants and Landlords?
- Landlords must not terminate leases as a result of non-payment of rent during the Pandemic Period.
- Landlords should share any benefit received of deferral of loan payments with tenants.
- Landlord should be reasonable in circumstances where tenants are unable to trade to waive expense or outgoings payable.
- Tenants must otherwise comply with all terms of their current leases.
- Both parties are to negotiate in good faith.
- Each party is to provide transparent information within the context of negotiations.
- No interest, fees or charges should be applied to any unpaid rent in accordance with rent reduction;
- Landlords are unable to draw on tenant security such as bank guarantee or cash bond; and
- There is a binding dispute resolution procedure, particularly where one party is attempting to delay negotiations.
What to do?
The principles of the Code are not as straight forward as expected. Accordingly, the onus is on the parties of a lease to engage in reasonable negotiation to facilitate a mutual agreement based on the principles in the Code.
The Code is subject to the Federal and State Parliaments passing the relevant legislation which could take some time. Accordingly, this time prior to enactment is crucial for tenants and landlords to document their arrangements under the Code to avoid later disputes.
If you successfully negotiate new terms with a landlord, these new terms should be set out in a legally enforceable Deed. An email or letter from a landlord will not suffice.