Heard about the new code of conduct for commercial leases? If you're a tenant, see if you qualify for reduced, deferred or waived rent during COVID-19; if you're a landlord, what are your rights and obligations?
As we move deeper into COVID-19, rent is the million dollar question.
How are pandemic-affected business owners expected to cover rent? And what will landlords do if their tenants can't pay?
Short of footing the collective bill, the PM this week announced a mandatory code of conduct based on "good faith" between parties to ease the pressure on commercial leaseholders, while encouraging an open dialogue with landlords.
This is vital reading for anyone concerned about rent - whether you're a tenant or landlord. Get to know exactly what you're entitled to under the new code of conduct, today.
WHAT IS THE CODE?
On April 7 2020, Prime Minister Scott Morrison released the National Cabinet's Mandatory Code of Conduct SMW Commercial Leasing Principles During COVID-19. "The Code" for short.
The Code has a goal: to impose a set of good faith leasing principles to govern commercial tenancies - including retail, office and industrial.
In essence, it asks tenants and landlords to work together, be reasonable, share the burden, and show consideration towards their fellow humans - very few of whom remain unaffected by the all-pervasive pandemic.
These agreements will be made with respect for individual circumstances, and implemented by states and territories through appropriate legislation or regulations.
DO YOU QUALIFY FOR THE CODE?
The Code applies to all tenants experiencing financial stress or hardship as a result of COVID-19; which is an individual, business or company unable to generate sufficient revenue as a direct result of the COVID-19 pandemic.
Put simply, if you're a tenant who's eligible for the Government's JobKeeper programme and have an annual turnover of up to $50m, you're "suffering financial stress" for the purposes of The Code. You're classed as an "SME Tenant".
PRINCIPLES OF THE CODE
There are three important principles underpinning The Code that are handy to understand.
#1 - Business Continuity: The first principle acknowledges that landlords and tenants share a common interest in working together to ensure business continuity, aiming for the resumption of normal trading activities at the end of the COVID-19 pandemic (plus a reasonable recovery period).
#2 - Proportionate and Appropriate Arrangements: The second principle takes into account the impact of the COVID-19 pandemic on the tenant; how revenue, expenses, and profitability have been affected. Arrangements should be proportionate and appropriate based on the impact of the COVID-19 pandemic (plus a reasonable recovery period).
#3 - Case-by-Case Assessment: The third principle recognises that no two leases are alike, and must be dealt with individually. Factors such as financial hardship, lease expiry date and whether the tenant is in administration or receivership should be respected.
WHAT DOES THE CODE MEAN FOR TENANTS?
So, you're an "SME Tenant". What now?
- No termination. Your landlord can't terminate your lease during the COVID-19 pandemic period (or reasonable subsequent recovery period) if you fail to pay rent.
- Rent reductions.
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(a) Your landlord must offer you a rent reduction (up to 100% of the amount you usually pay) in the form of waivers and/or deferrals.
(b) The reduction must be in proportion to how much trade you've lost as a result of the COVID-19 pandemic (plus a reasonable recovery period). If you've qualified for the JobKeeper payment, you're required to prove at least a 30% reduction in turnover.
(c) 50% of your rent payable (as determined under the principle at (b) above), minimum, should be waived. If you don't need the 50% minimum waiver, you can waive it.
(d) In addition, if you're still unable to meet your rent (despite the reductions and waivers), your landlord is obliged to waive more (subject to your landlord's financial ability to provide the additional waiver).
- Repayments. If you negotiate to pay rent back later, these payments should occur over an extended period of time - after the pandemic has officially ended - to avoid undue financial stress in the form of big lump sums.
- Lease extensions. You should be given an opportunity to extend your lease for the same amount of time as the rent waiver or deferral period, on existing lease terms.
- Rent freeze. Landlords should agree to a freeze on rent increases for the duration of the COVID-19 pandemic (plus a reasonable subsequent recovery period).
- No penalties. You can't be prohibited or penalised for reducing opening hours or ceasing trade during the COVID-19 pandemic.
WHAT DOES THIS MEAN FOR LANDLORDS?
If you're a landlord in the time of COVID-19, you're being called upon to exercise compassion and understanding - but that doesn't mean you're without rights. Here's a summary of how The Code affects, and protects, you.
- No penalties. Don't hit your tenants with fees, interest or other charges with respect to rent waived. No punitive interest on deferrals, either.
- Tenant compliance. Your tenants must remain committed to the terms of their lease, subject to any amendments negotiated under The Code.
- Your financial position. Even though you're encouraged to negotiate waivers, regard must be given to your financial ability to provide such waivers, too.
- Repayments. If you've negotiated deferred rental payments, you must allow them to be paid back over the rest of the lease term and in no less than 24 months (unless otherwise agreed).
- Pass on reductions you enjoy. Any reduction in statutory charges (e.g. land tax, council rates) or insurance must be passed on to the tenant in an appropriate proportion, according to the terms of the lease.
- Pass on benefits. You must share any benefit you've received - due to deferral of loan payments provided by a financial institution, for instance - with your tenants.
- Other expenses. You should be open to waiving other expenses (or outgoing payables) by your tenants during the period they're unable to trade. You can reserve the right to reduce services as required in such circumstances.
- Can't draw on security. You must not draw on your tenant's security if they fail to pay rent (such as cash bonds, bank or personal guarantees) during the COVID-19 pandemic and/or a reasonable recovery period thereafter.
THE HUMAN ELEMENT
The Code asks landlords and tenants to act in an open, honest and transparent manner, each providing the other with sufficient* and accurate information to negotiate fairly according to The Code.
With unprecedented times come unparalleled opportunities to be flexible, compassionate and cognizant of humans as individuals. Everyone's circumstances are a little different; conversations taking that little bit longer as we all muddle through.
If you're struggling to reach a leasing agreement with your landlord or tenants (as a direct result of the COVID-19 pandemic), The Code provides binding mediation obligations - not to be used to prolong or frustrate an amicable resolution.
Footnote
* "Sufficient information" is information generated from an accounting system or provided to/received from a financial institution that impacts the timeliness of the parties making decisions with regard to the financial stress caused as a direct result of COVID-19.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
