Small to Medium Enterprises Commercial Leasing Principles
The National Cabinet is officially intervening to help provide rent relief to tenants of commercial premises who have been financially impacted by the coronavirus with the announcement of a new mandatory code of conduct. This is to enforce the extension of coronavirus related financial burdens to landlords. The expectation is that these will soon be legislated by the States & Territories. These changes are very substantial and in order to be applied will require financial transparency on behalf of both the tenant and the landlord. We are currently considering what this type of financial transparency might look like for both tenant and landlord clients. Where a commercial tenant is eligible for the ‘JobKeeper’ programme, they will be able to seek relief as outlined below.
A summary of the overarching principles:
- Landlords and tenants need to negotiate appropriate temporary arrangements in good faith;
- Both parties must be open, honest and transparent in the negotiations;
- The agreed arrangement will need to consider the impact on revenue, expenses, profitability and be proportionate based on the impact of COVID-19, including a reasonable recovery period;
- The Landlord and tenants will need to assist each other in dealing with other stakeholders (Governments, utility companies and banks) to achieve positive outcomes;
- It is not possible to form a collective industry position as all premises and arrangements are different. The Competition and Consumer Act 2010 still applies;
- The Landlord must not use this negotiation to permanently mitigate the risk of default on commercial leases;
- All leases are to be dealt with on a case-by-case basis;
The following principles must be used when negotiating temporary arrangements:
- Landlords must not terminate leases due to non-payment of rent for a reasonable recovery period following COVID-19;
- Tenants must still follow the terms of their lease including any amendments in order to remain protected under this Code;
- Relief must be offered as a proportionate reduction in the form of waivers or deferrals of up to 100% of the ordinary rent, determined on a case-by-case basis;
- The Rental waiver must be no less than 50% of the total reduction in rent;
- When there is an agreement to defer rental payments, the catch up payments are to be split over a minimum of 24 month period, or the remainder of the lease term, whichever is greater, unless otherwise agreed;
- The landlord must pass on any reductions in land tax, council rates or insurance to tenant in an appropriate proportion;
- The landlord must also pass on any benefits from the deferral of loan payments in a proportionate manner;
- Under lease terms the landlord should seek to waive the recovery of any other expense payable by a tenant while the tenant is not trading;
- Any arrangements that require repayments of rent should occur over an extended period to avoid further financial hardship, and should not be repaid until the end of the COVID-19 pandemic or the existing lease expiring;
- No fees, interest or charges should be applied in relation to rent waived or deferred;
- Landlords must not use the tenants security payment (bond) for the non-payment of rent;
- The tenant should have the opportunity to extend the lease for the equivalent of the waiver or deferral period to provide them additional time to trade;
- Landlords must freeze rent increases for the duration of the COVID-19 pandemic;
- There must not be any penalties applied from the landlord for reduced opening hours or ceasing trade from the landlord.
All tenants and landlords affected should seek to engage in these principles as soon as possible in order to achieve the best outcome. We discussed in our Directors Blog the importance of documenting these decisions appropriately.
For more detailed information, please refer to the following link: https://www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf
Please do not hesitate to call or email The Macro Group to discuss further with a team member.
Date published: 8 April 2020