Significant announcements have been in made over the last few days from both the federal and NSW state governments.
Commercial Leasing ‘Code of Conduct’
On April 7, 2020 the National Cabinet agreed to a mandatory Code of Conduct covering commercial tenancies between landlords and tenants, where those tenants had been impacted by COVID-19.
Who Is Eligible?
The Code applies to all tenants that are suffering financial stress or hardship that:
- have an annual turnover of up to $50 million; and
- are an eligible business for the purpose of the Commonwealth Government’s JobKeeper program. For these tenants, assuming they are not charities, this means that the business has lost 30% or more of their revenue compared to a comparable period a year ago.
Key Features of the Code
- There are a number of “good faith” measures including behaving honestly & transparently and seeking mutually satisfactory outcomes.
- There are 11 Leasing Principles to be applied on a case-by-case basis.
- Tenants must otherwise comply with their lease terms, subject to amendments to the rent as negotiated pursuant to the Code. A material failure to comply with the substantive terms of a lease means that a tenant forfeits any protections under the Code.
- Where landlords and tenants cannot reach an agreement, they will be subject to referral by either party to applicable State and Territory dispute resolution processes for binding mediation.
How Are Tenants Impacted By The Principles?
- Tenants will not be evicted due to non-payment of rent during the pandemic period (or reasonable subsequent period);
- Tenants will have the benefit of:
- proportionate reductions in rent payable in the form of waivers (being rent abatement) and deferrals of rent of up to 100% of the rent payable, based on the reduction in the tenant’s trade;
- rental waivers must constitute a minimum of 50% of the total reduction in rent payable over the pandemic period and should constitute a greater proportion of the total reduction in rent payable where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease;
- If rent is deferred, payment of the deferred rent must be amortised over the balance of the lease term or a period of no less than 24 months, whichever is greater (unless otherwise agreed). Repayment of deferred amounts cannot commence until the earlier of the pandemic end date (as determined by the Australian Government) or the existing lease expiring. Repayments should occur over an extended period to avoid placing undue pressure on tenants;
- No fees, interest or other charges may be applied in respect of rent waived.
- For retail tenants, landlords may not apply any prohibition or levy penalties if the tenant reduces opening hours or ceases to trade during the COVID-19 pandemic.
How Are Landlords Impacted By The Principles?
- Landlords must not terminate leases due to non-payment of rent during the pandemic period (or reasonable subsequent recovery period). However, this restriction on termination relates only to non-payment of rent. i.e A landlord will still be able to terminate a lease for other breaches.
- Where there is a reduction in statutory charges such as land tax and council rates, or insurance, that reduction must be passed onto the tenant in the appropriate proportion;
- Landlords must freeze any rent increases until the pandemic is over (excluding retail tenancies where rental is calculated pursuant to turnover rent);
- Landlords should seek to share any benefits received due to the deferral of loan payments provided by a financial institution as part of the Australian Banker’s Association’s COVID-19 response.
- Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant during the period the tenant is not able to trade;
- Landlords must not draw on tenants’ security for the non-payment of rent during the pandemic period and/ or a reasonable subsequent recovery period.
- Landlords should provide tenants with the opportunity to extend leases for an equivalent period of the rent waiver and/or deferral period to provide tenants additional time to trade during the recovery period on existing lease terms.
EXAMPLES OF THE APPLICATION OF THE PRINCIPLE OF PROPORTIONALITY
Examples of practical variations reflecting the application of the principle of proportionality may include, but are not limited to:
- Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis o ie. a 60% loss in turnover would result in a guaranteed 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
Example 1
- Tenant’s revenue has fallen by 100%
- Current rent is $3,000 per month
The landlord must provide 100% cash flow relief broken into 2 parts
(a) 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.
The landlord must provide 100% cash flow relief (i.e $3,000 x 100% = $3,000 relief) broken into 2 parts:
50% of the relief is to be provided as rent free/ rent waiver $1,500 (i.e $3,000 x 50%).
50% of the relief $1,500 is rent deferral, to be spread over term of lease, or at least 24 months.
The new rent is $0 (i.e $3,000 x 100%, the level turnover has fallen to).
Example 2
- Tenant’s revenue has fallen 60%
- Current rent is $4,800 per month
The landlord must provide 60% cash flow relief (i.e $4,800 x 60% = $2,880 relief) broken into 2 parts:
50% of the relief is to be provided as rent free/ rent waiver $1,440 (i.e $2,880 x 50%).
50% of the relief $1,440 is rent deferral, to be spread over term of lease, or at least 24 months.
The new rent is $1,920 (i.e $4,800 x 40%, the level turnover has fallen to).
Example 3
- Turnover has fallen 90%
- Current rent is $7,000 per month
The landlord must provide 90% cash flow relief (i.e $7,000 x 90% = $6,300 relief) broken into 2 parts:
50% of the relief is to be provided as rent free/ rent waiver $3,150 (i.e $6,300 x 50%).
50% of the relief being $3,150 is rent deferral, to be spread over term of lease, or at least 24 months.
The new rent is $700 (i.e $7,000 x 90%, the level turnover has fallen to).
Please note, parties would be free to make an alternative commercial arrangement to this formula if that is their wish.
Period That The Code Will Be In Effect
The Code states that it will come into effect on a date defined by each State or Territory after 3 April 2020 and apply for “the period during which the Commonwealth JobKeeper program remains operational”.
For both landlords and tenants, the actual impact of the Code will extend significantly beyond this period as the effects of rent deferrals and lease variations are felt.
For More Information
Speak to a lawyer specialising in commercial leasing
See Code of Conduct here
NSW Rental Assistance Package
Following on from the Federal Government’s mandatory code of conduct announced last week, NSW will announce a rental assistance package and most significantly covering residential tenants.
Key items would include:
-> A landlord or managing agent must enter into negotiations with a qualifying tenant.
-> 6-month moratorium on new forced evictions where tenants have been seriously impacted COVID-19, losing 25% or more of their income.
-> Unpaid rent will accrue over the balance of the lease.
-> $440m land tax relief package split evenly between commercial and residential landlords with landlords being eligible for a land tax concession of up to 25 per cent for the rest of this calendar year. A further land tax deferral for any outstanding amounts for a three-month period will also be offered to landlords who claim the land tax concession. Commercial landlords will be offered the land tax concession if they pass the savings on to tenants through a rent reduction of equal value; a further land tax deferral is available where rent relief is greater than 25% of land tax bill.
-> An interim 60-day moratorium would be in place for new applications to the NSW Civil and Administrative Tribunal for forced evictions over COVID-19-related rent arrears.