The Federal Cabinet has released a code of conduct (Code) to govern Small to Medium Enterprise (SME) Commercial Leases during the COVID-19 pandemic.
The Code’s purpose is to impose good faith leasing principles to aid cashflows for SME tenants and landlords. The Code reflects that landlords and tenants have a common interest in working together, and should negotiate in an open, honest, and transparent manner.
It is intended that the Code will be incorporated into each State and Territory’s legislation. We will need to examine the legislation passed by the NSW Government, to determine how faithfully the Code is incorporated.
The Code is designed so that financial hardship as a result of the COVID-19 pandeic is shared between tenants and landlords, with an intention that parties will agree to appropriate arrangements on a case-by-case basis. The Code applies to all tenancies that are that are eligible for the Government’s JobKeeper program and have an annual turnover of up to $50 million.
The Code sets out an extensive list of principles to guide the respective state legislature and agreements between landlords and tenants. Importantly, where a landlord and tenants cannot reach agreement on leasing arrangements (with issues arising out of the COVID-19 pandemic), the matter should be referred to a binding dispute resolution process.
Of key importance to tenants is that landlords must offer qualifying tenants rent reductions, proportionate to the reduction in the tenant’s trade. The Code proposes the following leasing principles on a case-by-case basis:
Landlord’s must not terminate due to non-payment of rent during the pandemic;
Tenants must honour the lease. A material failure to abide by a substantive term or terms will forfeit any protections under the code;
Landlord’s must offer rent reductions by way of waivers and deferrals, during the pandemic, proportionate to the tenant’s reduced trade;
Any rental reduction must comprise at least 50% waiver and any deferral to be amortised over the lease term and for a period no less than 24 months;
Any reduction in statutory charges to the landlord (i.e. land tax), will be passed on to the tenant in appropriate proportion to the lease terms. Any other benefits the landlord received due to deferral of loan payments, should also be passed onto the tenant in a proportionate manner;
Landlords should waive recovery of any other outgoing under the lease, during the period the tenant cannot trade;
If negotiated arrangements under the Code require payment, payment should occur after the pandemic ending and take into account a reasonable recovery period;
No interest of other charges should be applied with respect to deferred or waiver rent;
Landlords must not draw on a tenants security during the pandemic and or a reasonable subsequent recovery period;
The tenant should be provided an opportunity to extend its lease, equivalent to the waiver or deferral period, to provide additional time to trade;
Landlords agree to free rent increases during the pandemic and or in the subsequent reasonable recovery period; and
Landlords may not apply any probation or levy penalties due to reduced hours or cease to trade during the pandemic
These are extensive measures that substantially protect tenants, although, the Code states that regard is to be given to the landlord’s financial ability to provide a waiver. We will know in the coming weeks to what extent these measures will operate once state legislature implements the Code.
The Code will be supported by state based Industry Code Administration committees to promote awareness, encourage application, and monitor its operation. We will provide further updates once applicable state legislation has been released.
Henry William Lawyers is available to assist tenants and landlords with their leases in this difficult time. Please contact the following persons should you or your business require any advice:
Ron Zucker +61 410 590 111
Alex Linden +61 404 821 471
Vincent Tripodina +61 408 228 108
Chelsea Woodward +61 404 065 899
Michael Mulvenna +61 424 622 174