by Stephen Lambourne
The purpose of the National Cabinet Mandatory Code of Conduct (“the Code”) is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.
The objective of the Code 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.
A Summary of the Code
- The Code encourages open and transparent negotiation between the parties to the lease.
- The Code will only apply should the tenant have a turnover less than $50M and is eligible for the JobKeeper programme, i.e. they have experienced a reduced turnover of more than 30%.
- The turnover threshold will apply to individual franchises at franchise level and retail corporate groups at group level.
- All premises are to be assessed separately and there are no collective industry positions.
Should an arrangement be entered into, the following will apply:
- Landlords will not terminate leases during the pandemic period.
- Tenants must adhere to the terms of their leases.
- Landlords must offer tenants a reduction in their rent of up to 100% based on the substantiated reduction in the tenants’ turnover as a result of COVID-19.
- Rental reductions must include no less than 50% of the reduction as a waiver.
- The remaining reduction is to be a deferral.
- Rental deferrals must be amortised over the balance of the lease or 24 months, whichever is the greater unless otherwise agreed to by the parties.
- The Code is not specific on outgoings payments where applicable, however it does mention that any reduction in statutory charges such as rates should be passed on to the tenant, which does indicate that outgoings are still payable. Hopefully this is clarified in the State Government announcements.
- The tenant should be offered the opportunity to extend their lease for a period equal to the adjustment period.
- Landlords will freeze all rent increases for the duration of the pandemic.
- The Code came into effect from 3 April and will be in place for the duration of the JobKeeper programme.
Suggestions to Tenants
- If you think you are eligible for JobKeeper register your interest.
- Contact your landlord to discuss.
- Keep accurate records of turnover reductions.
- Be prepared to share this information with your landlord.
Suggestions to Landlords
- Be proactive and communicate with your tenants.
- As a first step, ask your tenant for evidence of their eligibility for JobKeeper.
- Once this has been provided, discuss with the tenant the transparent provision of the business turnover reductions.
Our General Observations
We have noticed the following trends over the past two weeks that you should be aware of:
- Some tenants are requesting rental relief and are refusing to provide any details.
- Some ASX listed companies who are obviously not eligible for JobKeeper are sending standard letters to all landlords advising them (without negotiation) what they intend to pay moving forward. This is not covered by the Code and cannot be legally enforced.
- In general, most landlords and SME tenants seem to be working together to ensure both parties are still standing at the end of this.
Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis.
- i.e. A 60% loss in turnover should result in a 60% cash flow relief.
- At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.
- Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties.
- So if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.
- Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.
- The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.
Legislating the Code
While the Code has been agreed to by both Federal and State Governments, the legislation governing commercial leases rests with State Governments and as such each state will be providing more detail as to how the Code will operate in their state. The NSW government has said it aims to pass legislation as soon as possible.
If you are a landlord or tenant who is experiencing difficulties due to COVID-19, contact us below to discuss your options.