The Prime Minister has announced that the National Cabinet has approved a new mandatory “Commercial Tenancies Code” to assist in dealing with the fallout from the coronavirus pandemic.
Each state is expected to amend legislation to implement the Code’s principles shortly.
A copy of the code is available here.
What is the purpose of the Code?
The stated purpose of the Code is to “impose a set of good faith leasing principles…between owners/operators/other landlords and tenants where the tenant is an eligible business for the purpose for the Commonwealth JobKeeper programme.”
What is an eligible business?
The Code applies to SME tenants only – being tenants with a turnover of up to $50 million.
While we are awaiting the final JobKeeper legislation, Treasury’s Fact Sheet for Employers provides some guidance as to eligibilty, stating that businesses will be eligible for the Commonwealth JobKeeper Payment subsidy if (for the purposes of the Code) their turnover has fallen by more than 30%. The Fact Sheet goes on to state “To establish that a business has faced either a 30 (or 50) per cent fall in their turnover, most businesses would be expected to establish that their turnover has fallen in the relevant month or three months (depending on the natural activity statement reporting period of that business) relative to their turnover a year earlier.
The $50 million turnover will apply to franchise groups at the franchisee level, and for retail corporate groups at the group level.
How will the Code apply?
As noted above, the Code will be implemented in each State’s legislation (such as, in Queensland, the Retail Shop Leases Act 1994 (Qld). the Code will apply to all commercial leases – including retail, office and industrial leases.
The Code intends 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’.
What are some of the key principles of the Code?
The Code sets out a number of overarching principles that will apply in guiding arrangements between SME tenants and landlords, which include:
- the requirement to negotiate in good faith, and act in an open, honest and transparent manner, and provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the Code;
- arrangements need to take into account the impact of the Covid-19 pandemic on the tenant, with regard to revenue, expenses and profitability – arrangements need to be proportionate and appropriate based on the impact of the pandemic plus a reasonable recovery period.
What are some of the leasing principles of the Code?
The Code sets out a number of leasing principles that should be applied as soon as practicable on a case-by-case basis, which include
- Landlords must not terminate leases for non-payment of rent during the pandemic period or a reasonable recovery period;
- Tenants must remain committed to the terms of their lease (subject to amendments negotiated under the Code) and material failure to abide by the substantive terms of the lease will forfeit any protections provided under the Code;
- Landlords must offer proportionate reductions in rent payable in the form of waivers (which are amounts that cannot be recouped over the term of the lease) or deferrals of up to 100% of the amount ordinarily payable based on the reduction in the tenant’s trade during the pandemic period and subsequent reasonable recovery period.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable over the pandemic period and should constitute a greater proportion of a reduction where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must be had to the Landlord’s ability to provide additional waivers, and tenants may waive the requirement for a 50% minimum waiver.
- Rental deferrals 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.
- Reductions in some outgoings (land tax, rates, insurance) will be passed on to the tenant in the appropriate proportion.
- Landlords should share the benefit of any loan payment deferrals provided by a financial institution.
- Landlords should waive recovery of other expenses (such as outgoings) where a tenant is not able to trade.
- Landlords may not charge fees, interest or other charges in relation to rent waived, not fees charges nor punitive interest on deferrals.
- Landlords must not draw on a tenant’s security during the pandemic period and a reasonable subsequent recovery period.
- Landlords must agree to freeze on rent increases (apart from turnover rent based retail leases) during the pandemic period and reasonable subsequent recovery period.
What if landlords and tenants cannot agree?
Where landlords and tenants cannot reach agreement on leasing arrangements, the matter must be referred to any applicable dispute resolution processes for binding mediation.
What should you do next?
The Code has the potential to require potentially complex commercial agreements to be put in place for the pandemic period and subsequently. If you are a SME tenant of a commercial lease impacted by the pandemic, or own commercial property leased to a SME tenant, you should seek appropriate legal advice about your rights and obligations. If you hold commercial property through a self managed superannuation fund there are additional considerations.
If you are a commercial tenant or landlord and would like assistance in this area please contact us today on 07 5606 7332, or via our webform to make an appointment – please let us know if you would like a telephone or videoconference appointment.
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