National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19

13 May National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19

Summary

The National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles has been endorsed in New South Wales through the Retail and Other Commercial Leases (COVID-19) Regulation 2020. Its purpose is to impose good faith leasing principles for commercial tenancies and applies to those tenancies where the tenant is a small to medium sized business who is eligible for the JobKeeper program. The Code provides for 14 leasing principles, which will need to be applied on a case-by-case basis.

The Code

In April 2020, the Retail and Other Commercial Leases (COVID-19) Regulation 2020, under the Retail Leases Act 1994, was published to endorse the Federal Government’s National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (‘the Code’).

The purpose of the Code is to impose a set of good faith leasing principles for application to commercial tenancies between owners, operators, and other landlords and tenants. Its intention is to assist with the management of cashflow for both tenants and landlords because of the effect of COVID-19, whilst balancing their interests.

The Code applies to all commercial tenancies, where the tenant has signed up to the JobKeeper Program, as well as having an annual turnover of $50 million or less per annum. To be eligible for the JobKeeper program, there must be a 30% reduction in turnover relative to the corresponding period 12 months earlier, for companies with a turnover of up to $1 billion per annum. For companies that have a turnover of more than $1 billion, the reduction must be 50%.

In relation to franchises and retail corporate groups, the $50 million annual turnover threshold will be applied at the franchisee level, and at the group level.

Overarching principles of the Code

These principles should apply in determining the arrangements between tenants and landlords, and include:

• Landlords and tenants will negotiate in good faith, to work towards achieving mutually satisfactory outcomes, where the intention is to resume normal trading facilities at the end of the COVID-19 pandemic during a reasonable recovery period.
• Leases must be dealt with on a case-by-case basis, considering the specific terms and conditions of each lease.
• Landlords and tenants must act in an open, honest, and transparent manner and will each provide sufficient and accurate information to achieve the outcomes of the Code.
• The Parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord.

Leasing principles

The Code provides for the following leasing principles, which should be applied as soon as practicable, on a case-by-case basis:

1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
2. Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) 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 COVID-19 pandemic period and a subsequent reasonable recovery period.
4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
5. 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.
6. 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.
7. A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
8. Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
9. If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring and taking into account a reasonable subsequent recovery period.
10. No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
11. 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 period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
12. The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
14. Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

Binding mediation

In the event where landlords and tenants cannot reach an agreement on amending the leasing arrangements in accordance with the Code, either party may refer the matter to the NSW Small Business Commissioner, before applying to the NSW Civil and Administrative Tribunal for binding mediation.

If you require advice as to what this will mean for you as a landlord or a tenant, or you would like further information, please contact Ian Smith (ismith@harrisco.com.au; (02) 9261 8533) or Alexandra Tzavellas (atzavellas@harrisco.com.au; (02) 9261 8533).