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SME leasing principles during COVID-19: National Code of Conduct

08 April 2020

#Property & Real Estate, #COVID-19

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SME leasing principles during COVID-19: National Code of Conduct

With pressure mounting on landlords, tenants and the Federal and State Governments, the Prime Minister has announced a compulsory code of conduct (Code) for landlords and tenants dealings with rentals during the COVID-19 crisis. (The Code is set out in full at the end of this FAQ)

This article sets out the key elements of the Code by asking and answering some basic questions relevant to all landlords and tenants.

What is the purpose of the Code?

The purpose is to create a good faith negotiating environment within specific parameters for landlords and tenants to reach agreement about rents during the COVID-19 crisis. “The objective of the Code is to share, in a proportionate, measured manner, the financial risk and cash-flow impact.”

Who is captured by the Code?

The Code is intended to apply to all tenants to whom the Commonwealth Government’s JobKeeper program would also apply, with an annual turnover of up to $50 million, including franchises at the franchisee level. The Code also states the expectation that even if tenants do not meet this criteria, the Code should apply “in spirit” to all leasing arrangements for affected businesses.

When will the Code apply?

The commencement date will be determined by each State and Territory. It’s not clear if the Code will apply retrospectively to affect deals which may have already been done. The Code appears to be intended to be operational during the operation of the JobKeeper program and parties are expected to take into account “a reasonable recovery period”.

Are landlords only required to offer one deal for all tenants?

No. Landlords are expected to agree “tailored, bespoke and appropriate” deals on a case-by-case basis. Deals are expected to include proportionate reductions in rent. Deferrals and waivers are expected to be offered of up to 100 per cent of the rent payable.

What information needs to be provided or considered?

Parties are expected to work together in an “open and honest manner” and to provide relevant and accurate information about revenue, expenses and profitability to assist the process. This includes, from a landlord's perspective, accounting for benefits afforded by its bankers on loan payments.

What about outgoings?

Reductions in land tax and rates are expected to be passed on proportionately to tenants. Landlords should also seek to waive outgoings during periods where a tenant can’t trade. Importantly they are entitled to reduce services as required as well.

Are there guides on the level of rent assistance? 

Yes. Any rental reduction should be constituted by a minimum 50 per cent waiver component over the COVID-19 period. This isn’t intended to indicate that rents should be reduced by 50 per cent, but rather that whatever the reduction, 50 per cent of it should be waived as distinct from deferred. It is also intended that reduction in turnover should be met by cash-flow relief (see example below).

Do tenants have to repay deferred rent? 

Yes. Repayments 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. So if the lease ends during that period, the tenant still gets time to repay. 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 interest should be charged on deferred rent or outgoings.

Do ordinary rent increases apply? 

No. There is a freeze on rent increases. However, turnover rent can be collected from successfully trading tenants.

Do tenants have to trade? 

No. Tenants may cease to trade or reduce operating hours without penalty.

Can I call on a guarantee?

No. Landlords are prevented from drawing on a bank guarantee, security deposit or personal guarantee while COVID-19 pandemic continues and for a reasonable recovery period thereafter.

What happens if a tenant defaults?

Tenants are required to comply with their leases as modified by the arrangements agreed under the Code. If they do not, they will lose the protections afforded by the Code.

Does the Code provide an example of how it's intended to work? 

Yes. The following is extracted from Appendix 1 to the Code:

  • qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis:
    • ie. a 60 per cent loss in turnover would result in a guaranteed 60 per cent cash flow relief
    • at a minimum, half is provided as rent free or 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 per cent, then at least 50 per cent of total cash flow relief is rent free or rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30 per cent, then at least 15 per cent of total cash flow relief is rent free or 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.

Click here to read the full Code.

Next steps

If you are a business or an individual and consider your business or yourself to be affected by COVID-19 and the legislation changes on a Federal and State level, please do not hesitate to contact us.

Authors: Chris Brodrick

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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