On 7 April 2020, the Federal Government released a code of conduct (the Code) for commercial tenancies and its purpose is to impose a set of good faith leasing principles for application to commercial tenancies.
The Code applies to all tenancies that are affected by COVID-19 where the tenant is eligible for the JobKeeper program with an annual turnover of up to $50 million. Whilst some entities with a turnover of more than $50 million may be eligible for the JobKeeper payment, the Code would not ordinarily apply to them.
In addition to meeting the turnover threshold of $50 million, the business must meet all the other eligibility criteria as set out in the legislation for the JobKeeper payment (e.g. 30% drop in revenue for businesses with an aggregated turnover of less than $1 billion).
The code confirms that:
- for franchises, the $50 million turnover threshold applies at the franchisee level
- for retail corporate groups, the $50 million turnover threshold applies at the group level (and not individual retail outlet level)
Some of the main leasing principles that will be applied as soon as practicable on a case-by-case basis include:
- Conduct
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period or reasonable subsequent recovery period (relevant period)
- Tenants must remain committed to the terms of their lease
- Financial
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the relevant period.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable
- Payment of rental deferrals by the tenant 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.
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- Landlords should seek to share any benefit it receives due to deferral of loan payments with the tenant in a proportionate manner.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the relevant period.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the relevant period.
Example
A business is affected by COVID-19 and is eligible to receive the JobKeeper payment. Its turnover has reduced by 60% and the total rent payable under the terms of the lease is normally $10,000 per month.
Implications for the rental lease:
- The rental relief will amount to 60% i.e. $6,000 per month.
- At a minimum, the landlord must waive at least 50% i.e. $3,000 of the rental charges
- The remaining 50% i.e. $3,000 can be deferred and recouped over the balance of the lease term and for a period of at least 24 months, whichever is greater, unless otherwise agreed by the parties
- The tenant must pay $4,000 per month as a result of the deferrals and waivers.
Each State and Territory will need to implement legislation to bring this into effect, but it is intended that it would apply to all commercial leases including retail, industrial and office.
Please contact one of our advisors today if you would like more information in relation to this.