National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During The Coronavirus Pandemic
Prime Minister Scott Morrison released a statement on 7 April 2020 regarding the decision reached by the Cabinet, in cooperation with States, Territories and various industries, with respect to the new mandatory Commercial Tenancies Code.
The Code aims to preserve the lease and relationship between tenants and landlords whilst also preserving the value of the properties underpinning the lease through this proactive, constructive and cooperative mechanism.
The National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 is accessible here.
The Code imposes a set of good faith leasing principles on landlords that apply to all commercial tenancies where the tenant is suffering financial stress or hardship as a result of the COVID 19 pandemic. Eligibility is assessed by the tenant’s eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million.
Notably, the annual turnover criteria will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).
The Code will be given effect through relevant state and territory legislation or regulation as appropriate. While the Code is not intended to supersede such state and territory legislation, it aims to complement it during period of the COVID-19 crisis. We anticipate the Code will be included in each jurisdiction’s relevant legislation as a Schedule that informs the operation of the provisions of that legislation. This will be confirmed as we see the Code rolled out across the various states and territories.
The code has been formulated in accordance with the Hibernation Strategy approach to dealing with the effects of COVID-19 on business activity. This is to preserve the foundations and pillars of the economy in a bid to rebuild and grow the economy through the pandemic and the period following the pandemic. The code combines a set of good-faith leasing principles which should be applied. We extract those principles below:
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 amendments 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 waivers and deferrals of rent up to 100% of the amount ordinarily payable, on a case-by-case basis, proportionate to reductions 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 over the COVID-19 pandemic period. Waivers should constitute a greater proportion of the total reduction in rent where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease. Regard must also be given 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 received by way of deferral of loan repayments with the tenant in a proportionate manner.
8. Landlords should seek to waive recovery of any other expenses or outgoing payable under the lease during the period the tenant is not able to trade (if appropriate to do so). Landlords reserve the right to reduce services as required in such circumstances.
9. If negotiated arrangements under this Code necessitate repayment, repayment should be made over an extended period 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 under the Code and no fees, charges nor punitive interest may be charged on deferrals under the Code.
11. Landlords must not draw on a tenant’s security for the non-payment of rent (i.e. 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. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period following the COVID-19 pandemic.
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 on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
In cases where landlords and tenants are unable to reach an amicable agreement on leasing arrangements, the issue should be referred to applicable state or territory retail and commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners, Champions or Ombudsmen as applicable.
This Code comes into effect in all states and territories from a date following 3 April 2020 to be defined by each respective state and territory jurisdiction, for the period during which the Commonwealth JobKeeper program remains operational.
For more information on the JobKeeper program, please see our recent article on the topic here.
Rostron Carlyle Rojas Lawyers is here to help
These are uncertain days for SME business and the laws around eligibility for stimulus packages are evolving on a daily basis.
Rostron Carlyle Rojas Lawyers remains committed to keeping you up to date with how the various COVID-19 response measures may impact on your business. As the needs and circumstances of each business are individual to them, it is important to that directors of companies seek qualified advice with how to navigate the rapidly evolving state of corporate law in Australia.
Speak with our team at Rostron Carlyle Rojas Lawyers for qualified advice that is tailored to your business’ specific issues.
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