Simeoni News Update – Commercial Leasing and COVID-1908th Apr 2020
Mandatory Code of Conduct released
At Simeoni & Co we have been closely following this issue because we know how important it is for many of our clients. The economic impact of COVID-19 on business generally, and commercial leasing arrangements has been profound. On 7 April 2020, the Federal Government released its much-anticipated Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (the Code).
The Code adopts and builds on principles emanating from National Cabinet Meeting discussions concerning commercial tenancies and is to be implemented by states and territories through legislation or regulation. It imposes a set of leasing principles to apply to commercial tenancies (retail, office and industrial) between owners / operators / other landlords and tenants, in circumstances where the tenant is an eligible business – a small-medium sized business (with annual turnover of up to $50 million) that, due to financial stress as a result of the COVID-19 pandemic is eligible for the Commonwealth Government’s JobKeeper programme.
The Code is intended to apply for the period during which the Commonwealth JobKeeper program remains operational. This is presently a six month period commencing from 30 March 2020.
What are the objectives of the Code?
The Code’s purpose is ‘to share, in a proportionate, measured manner, the financial risk and cash flow impact during the COVID-19 period whilst seeking to appropriately balance the interests of tenants and landlords.’
It outlines a framework for landlords and tenants to negotiate transparently and in good faith to reach tailored solutions.
Effectively, the Code enables eligible commercial tenants to receive rent relief in the form of waivers or deferrals (proportionate to trading reduction of their business) to help them survive the pandemic and beyond.
What are the Leasing Principles?
- Landlords are prohibited from terminating leases for non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period)
- Subject to negotiated amendments, tenants must otherwise commit to and fulfill the substantive terms of the lease. Failure to do so will forfeit protection under the Code.
- Landlords must offer proportionate rent reductions in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, based on the reduction in tenant’s trade during the COVID-19 pandemic period and subsequent reasonable recovery period.
- A rental waiver must be no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period, or greater in cases where the tenant’s capacity to fulfill their obligations under the lease would otherwise be compromised. The landlord’s financial ability to provide such additional waivers must be taken into consideration.
- Unless otherwise agreed, payment of deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater.
- Landlords may not apply fees, interest or other charges with respect to rent waivers and deferrals.
- Reductions in statutory charges (land tax, council rates) or insurance should be passed onto tenants reflective of how these are proportioned in the lease.
- Landlords are prohibited from calling in a bank guarantee, personal guarantee or security deposit for non-payment of rent during the COVID-19 pandemic period and /or a reasonable subsequent recovery period.
- Apart for retail leases based on turnover rent, rental increases are to be frozen for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.
- Tenants should be provided an opportunity to extend a lease for the equivalent period of a rent waiver and / or deferral period.
- Where agreement cannot be reached, matters should be referred, and subject to, relevant state and territory resolution processes.
What should tenants and landlords do?
Tenants and landlords should now negotiate in good faith to reach practical solutions that will sustain both, not only during the pandemic, but into the future. Many negotiations will be challenging and complex. Good Real Estate Agents can help landlords and tenants with those negotiations.
Negotiations should consider:
- the Mandatory Code of Conduct and relevant state / territory legislation and regulations;
- the terms of the current leasing arrangements, including when does the lease expire, option periods;
- whether the tenant qualifies for JobKeeper assistance;
- any loan repayment holidays provided by lending institutions to the landlord and what other relief the landlord may be able to obtain on outgoings such as land tax and rates;
- the documentation required to show actual losses / decreases in turnover suffered by a tenant due to COVID-19 (bank statements, accounting records);
- realistic timeframes for recovery with possible extensions to moratorium periods;
- any variations / extensions to the term of the lease, including extending the current lease term by the period of time that the landlord offers rent relief for.
We encourage the use of good Commercial Real Estate Agents who are already familiar with the Code, commercial leases and have a good understanding of the commercial difficulties that both landlords and tenants are experiencing during the pandemic. It is important that all agreements about leasing matters are documented in writing.
This material is general in nature and does not constitute legal advice. Each case is unique. It incorporates information based on our understanding of proposed or pending measures to address the impacts of Coronavirus (COVID-19) and may continue to change as developments unfold.
Paul Simeoni & Team