09/04/2020

The economic consequences of COVID-19 have had a major impact on the ability of organisations to generate cash flow and pay ongoing liabilities, such as rent.  In response, the Australian Government has developed a Mandatory Code of Conduct for Small to Medium Enterprises (SME) (which will include eligible not for profits) to assist with negotiating temporary commercial leasing arrangements and to aid the management of cashflow during the COVID-19 pandemic and for a reasonable recovery period afterwards.

The information set out below is intended as a broad guide to help determine whether an organisation might be eligible to negotiate temporary lease terms pursuant to the Code.  It does not include all detail of the Code.  If you think your organisation might be covered by the Code, you should seek advice to determine the extent of the impact of the Code for your organisation’s particular circumstances.

When will the Code come into effect?

The National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (the Code) will be given effect through relevant State and Territory legislation or regulation and is intended to complement existing legislation.  It will come into effect once the relevant State or Territory has passed legislation to implement it and will be in place for the duration of the Commonwealth JobKeeper program. 

The Code imposes a set of good faith leasing principles on commercial tenancies between landlords and tenants.

Does the Code apply to your organisation’s tenancy?

The Code will apply to tenancies where an organisation:

  1. has an existing commercial tenancy (including a retail, office or industrial tenancy); and
  2. is suffering financial stress or hardship as a result of the COVID-19 pandemic.  An organisation will be deemed to be suffering financial stress if it is eligible for the Commonwealth Government’s JobKeeper program or it is unable to meet its financial or contractual obligations as a direct result of the impact of COVID-19; and
  3. has an annual turnover of $50 million or less.

For more information on whether you are eligible for the Commonwealth Government’s JobKeeper program, see Gilbert + Tobin’s article on COVID-19: JobKeeper wage subsidy.

Important principles underpinning the Code

  • The aim of the Code is to share financial burden in a proportionate manner during the COVID‑19 period, in a way which takes into account the impact COVID-19 has had on your organisation and balances that with the interests of your landlord.
  • The Code encourages landlords and organisations to negotiate in good faith and agree on appropriate temporary rent arrangements.  Examples of alternative arrangements are set out in the Code, but the application will depend on your organisation’s particular circumstances.  
  • The Code also provides some additional protection for organisations, for example:
    • If your organisation is unable to pay rent, the lease cannot be terminated during the COVID-19 pandemic period and for a reasonable recovery period afterwards.
    • If your organisation is unable to pay your rent, the landlord cannot use your organisation’s security to cover the non-payment.
    • Your landlord cannot increase your organisation’s rent during the COVID-19 pandemic period and for a reasonable recovery period afterwards.

What sort of relief can an organisation seek from a landlord?

While negotiating with your organisation’s landlord, it is important to keep in mind that landlords and tenants must negotiate in good faith.  This means that your organisation should be negotiating in an open, honest and transparent manner.

Any arrangement with your landlord must take into account:

  • The impact of the COVID-19 pandemic on your organisation, including your organisation’s revenue, expenses and profitability;
  • Whether the lease is already in arrears or has expired and is in ‘hold-over’;
  • Whether your organisation is in administration or receivership; and
  • The fact that the risk of default on commercial leases is borne by the landlord.

The Code sets out some leasing principles which might be appropriate depending on your organisation’s circumstances.  The landlord cannot charge any fees for implementing these changes:

  1. Rent reduction – Your organisation can ask for a reduction in rent that is proportionate to the reduction in your organisation’s trade during the COVID-19 pandemic period.  For example, if your organisation has experienced a 30% reduction in trade, your organisation is entitled to 30% cashflow relief.
  2. Rental waiver and deferral – Your organisation can ask the landlord for cashflow relief in the form of a rental waiver and / or a rental deferral.
    • A rental waiver means that your organisation will never need to pay the landlord for the amount waived.  The Code requires that rental waivers account for at least half of the rental relief provided, proportionate to your organisation’s reduction in trade.
    • A rental deferral means that your organisation will eventually need to pay back the amount deferred and will account for less than half of the rent relief provided, proportionate to your organisation’s reduction in trade.

      For example, if your organisation has experienced a 30% reduction in trade, a minimum of 15% of your rental relief must be provided through a rental waiver, and a maximum and 15% of your rental relief must be provided through a rental deferral.
  3. Lease extension – Your organisation can ask for your landlord to extend the lease for a period that is equivalent to the rent waiver and / or deferral period.  This is intended to provide your organisation with additional time to trade on existing lease terms.

These are just some of the adjustments that can be sought under the Code.  Eligible organisations should refer to the Code in its entirety, or seek legal advice, to consider if other adjustments are appropriate in its case.

What if the Commonwealth Government is my landlord?

The Commonwealth Government will be waiving rents for all its SME and not for profit tenants within its owned and leased property across Australia. 

By doing so, SME and not for profit tenants will be required to continue to engage their employees through the JobKeeper initiative where eligible, and if applicable, provide rent relief to their subtenants.

How does your organisation achieve these changes?

Changes to tenancy arrangements are brought about by mutual agreement between the tenant and the landlord.  This means that your organisation will need to negotiate in good faith with your landlord to agree on any changes to your tenancy agreement. 

Your organisation will also need to provide sufficient and accurate information to your landlord to determine the proportion of rent relief your organisation is entitled to.  The Code indicates that sufficient and accurate information includes information generated from an accounting system, and information provided to or received from a financial institution, which is relevant to the financial stress caused as a direct result of the COVID-19 event.

If your organisation is unable to reach an agreement with your landlord, your organisation should refer the matter to your relevant state or territory commercial leasing dispute resolution processes for binding mediation.  However, landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.

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