On 7 April 2020, the Federal Government released the National Cabinet Mandatory Code of Conduct (the Code), which is applicable to certain commercial tenancies of small and medium enterprises which have been impacted by the COVID-19 pandemic (SME Tenancies).
The Code is to be introduced into law by each State and Territory by legislation or regulations and will apply from a date after 3 April 2020 (to be defined by each State or Territory in legislation or regulations) and continue to operate while the JobKeeper programme is operational, which is currently until 27 September 2020.
Application of the Code
The Code applies to all commercial tenants (including retail and industrial tenants) who:
- are suffering financial stress or hardship due to the COVID-19 pandemic and are eligible for the Federal Government’s JobKeeper programme; and
- have an annual turnover of $50,000,000 or less (the Turnover Threshold).
In regard to franchises, the Turnover Threshold will be applied at the franchisee level.
In regard to retail corporate groups, the Turnover Threshold will be applied at the group level, and not the individual retail outlet level.
Overarching Principals
The Code provides overarching principals which work to meet the objective for SME Tenants and their landlords to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to balance the interests of SME Tenants and their landlords.
The overarching principles include:
- SME Tenants and landlords share a common interest to work together to ensure businesses can survive and facilitate the resumption of normal trading activities;
- SME Tenants and landlords will negotiate in good faith to agree on temporary leasing arrangements to achieve mutually satisfactory outcomes;
- SME Tenants and landlords will act in an open, honest and transparent manner, disclosing sufficient and accurate information to achieve outcomes consistent with the Code;
- agreements must take into account the impact of COVID-19 on the SME Tenant in regard to revenue, expenses and profitability, and be proportionate to the impact;
- SME Tenants and landlords must assist each other in their dealings with other related stakeholders, including governments, utility companies, and financers in order to achieve outcomes which are consistent with the Code;
- landlords must not seek to permanently mitigate their risk in relation to default in negotiating agreements; and
- each lease must be considered on a case-by-case basis, having regard to the hardship suffered by the SME Tenant.
Leasing Principles
The Code provides the following leasing principles which 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);
- SME Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided by the Code to a SME Tenant;
- landlords must offer SME 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 SME 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 may be greater where failure to do so would compromise the SME Tenant’s capacity to fulfil their ongoing obligations under the lease agreement, having consideration to the landlord’s financial ability to provide such additional waivers. SME Tenants may waive the requirement for a 50% minimum waiver;
- payment of rental deferrals by an SME Tenant must be amortised over the balance of the lease term, commencing after the end of the pandemic period; however, should less than 24 months remain in the term after the end of the pandemic period, then a SME Tenant may pay the deferred rent over a period and for a period of no less than 24 months, unless otherwise agreed by the parties;
- any reduction in statutory charges (e.g. land tax, council rates) or insurance incurred by a landlord will be passed on to the SME 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 by its financer, with the SME Tenant in a proportionate manner;
- landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a SME Tenant, under lease terms, during the period the SME Tenant is not able to trade, and landlords may reduce services to the leased premises 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 SME 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 on waived or deferred rent;
- landlords must not draw on a SME 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;
- SME Tenants should be provided with an option to extend leases for an equivalent period of the rent waiver and/or deferral period;
- landlords will not increase rent (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period; and
- 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.
Reaching an Agreement
SME Tenants and landlords should apply the above Overarching and Leasing Principles to negotiate rent relief packages. If the parties fail to reach an agreement, the Code refers to a binding mediation process which will be implemented by each State and Territory; however, in Queensland legislation has not yet been introduced as at the date of this article.
Example of the Code’s Application
A tenant, who has provided sufficient and accurate information to the landlord which demonstrates that the tenant’s usual turnover is less than $50,000,000, has experienced a 70% reduction in turnover since 1 April 2020, due to COVID-19. The tenant is therefore an SME tenant and the lease is subject to the Code.
Taking the Code into consideration, the SME tenant and the landlord agree to the following:
- 35% waiver of rent during the pandemic period;
- 35% deferred rent to be repaid, interest free, over the final 24 months of the lease term;
- 30% of rent will continue to be paid during the pandemic period; and
- the landlord will not terminate the lease due to non-payment of rent and will not call on a personal guarantee.
The agreement is in accordance with the Code as the total waivers and deferrals are proportionate to the reduction in turnover, the total waivers represent half of the reduction in turnover, and the landlord is complying with the moratorium against termination and calling on security during the pandemic period.
If you require assistance in either understanding the application of the Code to your circumstances, or negotiating your lease pursuant to the Code, please do not hesitate to contact Tyler Smith by email at tyler@nautiluslaw.com.au, or phone on 07 5574 3560. We will be happy to assist you!
Code of Conduct – https://www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf
JobKeeper Payment FAQ – https://treasury.gov.au/sites/default/files/2020-04/JobKeeper_frequently_asked_questions_2.pdf
JobKeeper Legislation – https://www.legislation.gov.au/Details/F2020L00419
Author – Tyler Smith
