Commercial leasing principles for SMEs and their landlords during COVID-19
The National Cabinet has released a mandatory Code of Conduct (the Code) that applies to commercial tenancies, including retail, office and industrial leases. The Code aims to support small and medium enterprises (SMEs) that are suffering financial stress or hardship due to the COVID-19 pandemic.
Eligibility, implementation and regulation
The Code applies to SMEs that are an eligible business for the purposes of the JobKeeper program. Each state and territory will be responsible for the implementation and regulation of the Code and its principles within its jurisdiction. Each jurisdiction will also determine the date the Code comes into effect, which will be a date following 3 April 2020. The Code will remain operational for the same period of time as the JobKeeper program (the COVID-19 pandemic period).
Purpose of the Code
The purpose of the Code is to proportionately share the financial risk and cashflow impacts during the COVID-19 pandemic period between the landlord and tenant. The Code aims to balance the interest of landlords and tenants so that they can negotiate and enact temporary arrangements that are appropriate and mutually beneficial to both parties.
Any arrangements must consider the financial impact of the COVID-19 pandemic on the tenant and aim to facilitate the continuation of normal trading for the tenant at the end of the pandemic. The proportion of rent relief must be consistent with the assessments undertaken in determining eligibility for the JobKeeper program.
The Code provides 14 leasing principles that should be applied when negotiating and enacting temporary arrangements under the Code. The principles should be applied as soon as is practical, which may differ on a case-by-case basis.
The key principles of the Code are summarised below:
No termination by landlords
Landlords cannot terminate leases during the COVID-19 pandemic period, or a reasonable subsequent recovery period, due to non-payment of rent by the tenant.
Compliance by with lease terms
Tenants must continue to be committed to the terms of the lease. This is subject to any amendments that have been made due to negotiations under the Code.
Rent reductions through waivers and deferrals
Landlords must offer tenants reductions in their rent payable. Reductions may be in the form of waivers and deferrals up to 100% of the ordinary rent payable. Rental waivers must be at least 50% of the total reduction in rent payable (unless the tenant chooses to waive this requirement).
Benefits passed on to tenants
Any reduction the landlord receives in statutory charges (such as land tax and council rates) or insurance needs to be passed on to the tenant in the appropriate proportion under the lease terms.
No fees, interest or other charges should be applied due to rental waivers or deferrals.
No draw on tenant’s security
Landlords cannot draw on a tenant’s security (i.e. cash bond, bank or personal guarantee) due to the non-payment of rent.
Extensions on lease period
Landlords should give tenants the opportunity to extend their lease for a period equivalent to the rent waiver or deferral period. This will provide tenants with additional time to trade under the existing lease terms after the COVID-19 pandemic ends.
Freeze on rent increases
Landlords must freeze on rent increases for the COVID-19 pandemic period and a reasonable subsequent recovery period. However, this will not apply where a retail lease is based on turnover rent.
Example of proportionality principle from the Code
Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis.
That is, a 60% loss in turnover would result in a guaranteed 60% cash flow relief.
At a minimum, half is provided as a 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 provide by way of a 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.
For more information on the impact the commercial leasing principles may have on your business please contact your usual Mazars advisor or alternatively:
Brisbane – Nathanael Lee
Melbourne – Michael Jones
Sydney – Stephen Baxter
+61 7 3218 3900
+61 3 9252 0800
+61 2 9922 1166
A copy of the National Cabinet Mandatory Code of Conduct can be found here.
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