The National Cabinet (comprising Federal Government & State Governments leaders) have introduced a Mandatory National Code of Conduct for Tenants and Landlords that mandates Landlords to grant small and medium business enterprises rental waivers and rental deferrals effective from the 3 April 2020 where they are suffering Financial Distress and Hardship as a direct result of the COVID-19 pandemic.
Under the Mandatory Code of Conduct, Landlords are required to provide a rent reduction proportionate to the trading reduction in the Tenant’s business caused by the coronavirus pandemic through a combination of rent waivers and rent deferrals.
Landlords must offer rent waivers of no less than 50% of the total rent reduction with the balance of the rent reduction being in the form of a rental deferral. The rental deferral payments must be amortised over the remainder of the lease term and at a minimum be no less than over 24 months.
Mandatory Code of Conduct – Key Items
- Commercial tenancies including retail, office and industrial leases
- Eligible for Small & Medium Enterprise (SME) Tenants with an annual turnover < $50 million and
- Automatically applies to SME Tenants who qualify for the government’s “JobKeeper Program”
- Effective from the 3 April 2020 and will run for the period that the “JobKeeper Program” remains operational and applies to all states and territories.
- Landlord to offer Tenant “Rent Reduction” in a combination of (1) Rent Waiver (which is be no less than 50% of total rent reduction and (2) Rent Deferral for the balance over no less than 24 months.
Accordingly, if your business is eligible for the “JobKeeper Program” and you are a Tenant paying rent for a retail, commercial or industrial premise(s) then you are eligible for a Rent Waiver and Rent Deferral under the Mandatory Code of Conduct for Tenants & Landlords, effective from the 3 April 2020 for the period that the “JobKeeper Program” continues to operate up to (currently stated to the 27 September 2020).
Application of the Mandatory Code of Conduct
Purpose & Application of Code of Conduct
The purpose of this Mandatory Code of Conduct (“Code”) is to impose a set of good faith leasing principles for application to commercial tenancies (retail, office & industrial) between owners / operators / other Landlords and Tenants, where the Tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper Program.
This Code applies to all SME Tenants (annual turnover <$50m) that are suffering financial stress or hardship as a result of the COVID-19 pandemic and SME’s that are eligible for the Commonwealth Government’s JobKeeper Program are automatically included within this Code of Conduct.
Financial Stress or Hardship is defined in the Code of Conduct as “an individual, business or company’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) that causes the tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments. SME tenants which are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under this Code”. Accordingly, if you are eligible for the “JobKeeper” payment then you are automatically included within the Code.
The Code of Conduct will be given effect through relevant state and territory legislation or regulation as appropriate. The Code is not intended to supersede such legislation, but complement it during the COVID-19 crisis period. The arrangements will be overseen through a binding mediation process run by the states.
Landlord to Offer Rent Reduction to Tenant (Combination of Waiver + Deferral)
Under the Code Landlords must offer Tenants proportional reductions in rent payable (ie reduction in rent) in the form of rent waivers and rent deferrals of up to 100% of the ordinary rent payable on a case by case basis, based on the reduction in the Tenant’s trade during the COVID-19 pandemic period. This is effective from 3 April 2020 to the end of the period during which the JobKeeper Program remains in operation.
Of the rent reduction offered to the Tenant, the rent waiver must be no less than 50% of the total rent reduction. Regards must be had to the Tenant’s capacity to fulfil their obligations under the lease and also to the Landlords financial ability to provide such waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement with the Landlord.
Landlord & Tenant Agreement
It is intended that Landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME Tenant taking into account their particular circumstances on a case-by-case basis. The Code provides “Overarching Principles” in guiding such arrangements and “Leasing Principles” in negotiating and enacting temporary arrangements under this Code. For your negotiations please refer to these “Overarching Principles” and “Leasing Principles” in the Code of Conduct at the following link Mandatory Code of Conduct
Where Landlords and Tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic) the matter should then be referred and subjected (by either party) to the applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation. Such mediation should include Small Business Commissioners / Champions / Ombudsmen where applicable.
Examples of the Principle of Proportionality
Turnover Reduction = 80%
- Loss in turnover of 80% = cash flow relief in the form of a total rent reduction of 80%
- Minimum requirement under Code = 50% rent waiver and 50% rent deferral over at least 24 months
- Therefore rent waiver = 40% of total rent payable and rent deferral = 40% of total rent payable
Turnover Reduction = 30%
- Loss in turnover of 30% = cash flow relief in the form of a total rent reduction of 30%
- Minimum requirement under Code = 50% rent waiver and 50% rent deferral over at least 24 months
- Therefore rent waiver = 15% of total rent payable and rent deferral = 15% of total rent payable
Key Principles
- Tenant & Landlord are free to make alternative commercial arrangements to this formula
- The rent reduction automatically applies whilst the Tenant is eligible for the JobKeeper program
- If ineligible for the JobKeeper program and suffering financial stress then the Tenant needs to prove Financial Stress and Hardship in accordance with the Definition 1 of the Code of Conduct
If you are unclear on the application of this Code of Conduct, uncertain of the next steps or need any assistance then please contact direct your account manager who will be able to assist you. For further information on COVID-19 and the implications for your business, please refer to our website www.mitchell.com.au where we have a number of resources to help you navigate through these difficult and uncertain times.
