Mandatory Code of Conduct - SME Commercial Leasing Principles
On 7 April 2020, the Federal Government introduced the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles (Code).
The Code is a mandatory code of conduct for landlords and their SME tenants.
The Code remains in effect until the Commonwealth JobKeeper programme ends.
Who does the Code apply to?
The code applies to all commercial leases where the tenant is a small or medium enterprise (SME).
An SME tenant is one who is eligible for the Commonwealth JobKeeper programme.
This means the tenant must either:
- have an annual turnover of less than $1billion and their turnover has (or is likely to) fall by more than 30% in 2020; or
- have an annual turnover of $1billion or more and their turnover has (or is likely to) fall by more than 50% in 2020.
What is in the Code?
The code contains:
- A set of overarching principles which apply to arrangements made between tenants and landlords of commercial premises; and
- A set of leasing principles which provide specific relief for commercial tenants.
The critical elements of the overarching principles require landlords and tenants to:
Work together to:
- Ensure business continuity; and
- Facilitate the resumption of normal trading activities with a reasonable recovery period.
- Negotiate in good faith.
- Achieve proportionate and appropriately balanced arrangements between landlord and tenant.
The leasing principles offer the following relief:
- A landlord cannot terminate a commercial lease for non-payment of rent during COVID19 and a reasonable recovery period after.
- A tenant must perform the lease in accordance with its terms (including any negotiated amendments).
A landlord must:
- Offer a percentage reduction in rent (Rent Reduction); and
- Pass on any reductions in outgoings to its tenant.
- A landlord must not claim on the security deposit to cover non-payment of rent or to make up the difference caused by theRrent Reductions;
- A landlord must not increase the rent during the COVID19 period and during a reasonable subsequent recovery period; and
- The landlord must not charge any fees for the Rent Reduction.
It is necessary to look at the Rent Reduction in a little more detail.
First, ascertain the amount of the reduction:
- The proportion by which rent must be reduced is to be the same as the proportion of the decline in the tenant’s revenue.
- The reduction is to apply during the COVID19 period and for a subsequent reasonable recovery period (Deferral Period).
Second, give the tenant the benefit of the Rent Reduction.
There are two parts to the way the Rent Reduction is given:
1. At least 50% of the Rent Reduction is to be given in the form of a rent waiver.
The tenant is not required to pay that portion of the waived rent and will never be required to do so.
2. The balance of the Rent Reduction is to be given in the form of a rent deferral.
The tenant is not required to pay the amount of the deferred rent during the Deferral Period but will ultimately be required to pay the deferred rent.
Once the Deferral Period ends the deferred rent is payable by instalments either over a 24-month period or over the balance of the lease term (whichever is longer).
Example of Rent Reduction
- The rent for commercial premises is $10,000 per month
- The tenant experiences a 30% decline in revenue due to COVID19 during the Deferral Period.
- The Deferral Period is six months.
- After the Deferral Period the lease has 18 months to run.
- The amount of the Rent Reduction is $3,000 for each month of the Deferral Period, a total of $18,000.
- At least $9,000 of the Rent Reduction has to be waived.
- If $9,000 is waived, the remaining $9,000 of the Rent Reduction is to be deferred until the Deferral Period ends.
- After the Deferral Period ends, the $9,000 is to be paid by 24 instalments.
- The remaining $7,000 per month continues to be payable by the tenant during the Deferral Period.
We recommend that tenants and landlords have frank, commercial discussions to arrive at arrangements that allow each of them to continue their businesses.
The Code frames the requirement for landlords to make the offer – and the amount to be waived is not prescribed apart from the 50% floor so landlords could waive a higher amount. Landlords will also want to verify the revenue reduction.
So, it means there will need to be discussion about the exact terms of the arrangement and the arrangement should be carefully recorded in writing.
Aperion is offering a free 30-minute consultation for those who might want to know - or get a second opinion - about their particular situation in the current environment and want to discuss options available.
If you want to take advantage of this invitation, please contact:
Mark Allen on 0417 251 354 or firstname.lastname@example.org.
Peter Lightbody on 0419 166 828 or email@example.com.
Ashley Cheng on 0408 176 489 or firstname.lastname@example.org.