SME Leasing Principles during COVID-19:
National Cabinet Mandatory Code of Conduct
A large proportion of businesses have suffered substantial downturns in business due to COVID-19. A number of business uses or premises are required to be closed. Landlords rely on the rent being paid for their livelihood. Tenants rely on the space being leased as their place of business. The National Cabinet has just released a mandatory code of conduct which is still to be implemented through relevant State and Commonwealth laws.
If the Code of Conduct applies Landlords must offer Tenants a rent reduction. It can be by waiver (the Tenant does not need to pay it in the future) or deferral (the Tenant has to pay it in the future but over a term of not less than 24 months).
To impose a set of good faith leasing principles for application to retail, office and industrial premises where the tenant is an eligible business for the purposes of the Commonwealth Government’s JobKeeper program.
The Code of Conduct applies if:
- The Tenant’s turnover of less than $50 million; and
- The Tenant’s turnover has dropped by 30% or more; and
- The Tenant’s business is eligible for JobKeeper program.
To apply to negotiate amendments in good faith, to balance the impact in proportion between landlords and tenants.
Landlords and Tenants must:
- Share a common interest in ensuring business continuity and a resumption of normal trading activities at the end of the pandemic.
- Discuss the issues and negotiate temporary arrangements that are satisfactory to both.
- Negotiate in good faith.
- Be honest, open and transparent with each other.
- Agree on arrangements to take into account the impact on the Tenant’s revenue, expenses and profitability.
- Agree on the effect during the pandemic and during recovery time.
- Both assist each other with dealings with other parties such as the Government and banks.
The outcome of the Code of Conduct is:
- Landlord cannot terminate due to non-payment of rent.
- Landlord cannot call on bank guarantee or security deposit provided by Tenant for non payment of rent.
- Tenant must remain committed to its lease.
- Landlord must offer tenants proportionate reductions in rent as waiver of rent and/or a deferral of rent based upon the reduction of the Tenant’s trade during the pandemic and for a subsequent reasonable recovery period.
- If the rent is agreed to be reduced then the waiver must be not less than 50% of the total reduction in the rent payable. A waiver of rent means that amount does not need to be repaid.
- If the rent is deferred then there is to be an agreed term for it to be paid, but not less than 24 months.
- Any reduction in statutory charges such as land tax, Council rates and insurance is to be passed on to the Tenant.
- Rent increases are not to occur during the pandemic or within a reasonable recovery period.
What to do next
If you are a Tenant
- Contact your landlord to discuss.
- Have your figures for turnover at hand.
If you are a landlord
- If your tenant contacts you, be ready to discuss.
- Request figures for turnover.
- Be ready to reduce rent and pass on any concessions you have received from your bank, utility providers etc
Both tenants and landlords: Agree in writing and contact Watkins Tapsell to formalise the agreed changes. If you cannot agree we can also assist you with mediation to resolve any dispute.