On 7 April 2020, the Prime Minister announced the adoption of a mandatory Code of Conduct in relation to commercial tenancies.
The aim of the Code is to aid the management of cashflow for “SME tenants” and landlords on a proportionate basis.
The Code applies 14 principles to the temporary arrangements to be negotiated by landlords and SME tenants on a case-by-case basis, which are listed in detail in the Appendix. The key principles are:
1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
12. 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.
It applies to “SME tenants” that are suffering financial stress or hardship as a result of COVID-19. SME tenants are entities with turnover of less than $50m who are eligible for the Government’s JobKeeper program (e.g., suffering a turnover reduction of at least 30%).
- Landlords must not terminate leases due to non-payment of rent.
- Landlords must not draw on a tenant’s security for the non-payment of rent.
- 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.
- Rental waivers must constitute no less than 50% (unless waived by the tenant) of the total reduction in rent payable.
- 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 (unless otherwise agreed).
- No fees, interest or other charges should be applied with respect to rent waived and deferred.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent).
- Tenants must remain committed to the terms of their lease.
Each State and Territory will legislate the Code to be in effect from a date following 3 April 2020 (to be defined by each State and Territory) until the end of the Government’s JobKeeper program (27 September 2020).
Please refer to the worked example below on how we believe the Code will work in practice:
- A SME tenant suffers a reduction of 35% in monthly turnover due to COVID-19 between April 2020 – September 2020 (inclusive);
- The SME tenant is party to a commercial lease that runs to the end of June 2021 at a cost of $20,000 per month;
- Under this program, for the months of April – September (while the JobKeeper program runs), the landlord will need to provide a rent reduction of 35% or $7,000 per month;
- At least ½ of the reduction of $7,000 per month ($3,500), unless otherwise agreed by the tenant, needs to be provided in the form of a rent waiver. The landlord can never recover the rent waiver from the tenant;
- The remaining amount of the reduction (up to $3,500 per month, or greater if agreed otherwise by the tenant) needs to be provided in the form of a rent deferral;
- At a minimum, the deferral amount of $21,000 (assuming $3,500 per month for 6 months) can be collected over 24 months ($875 per month) from October 2020 to October 2022. No interest can be charged on the deferred rent;
- The tenant, whose lease would ordinarily expire in June 2021, should be offered the opportunity to extend the term to at least October 2022 in line with the deferral payment plan;
- From October 2020, monthly lease payments revert to normal (plus deferral payments).
In relation to residential tenancies, the Prime Minister announced that each State and Territory will develop its own code of conduct to apply within that jurisdiction.
Appendix – Full 14 principles applicable to temporary arrangements to be negotiated by landlords and SME tenants 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 under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
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, 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.
4. 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.
5. 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.
6. 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.
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 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.
9. 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.
10. 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.
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.
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 on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
For more information please contact Director of Taxation Services, Raffi Tenenbaum on 02 8262 8716 or email rtenenbaum@prosperity.com.au