The Code provides guidance on amendments to leases to help landlords and their commercial tenants share the cash flow impact of COVID-19 on a proportionate basis.
Start Date:
3 April 2020
Period Code Applies
Same period as the JobKeeper program operates
Who Code Applies To
Tenants and landlords under commercial leases including retail, office and industrial properties where the business tenant:
Is eligible for the JobKeeper program; and
Has annual turn over of $50m or less
In addition the principles of the Code states it 'should nevertheless apply in spirit to all leasing arrangements of affected businesses’.
This means it's a framework for negotiation between commercial landlords and tenants regardless of the above eligibility where the business has been impacted by COVID-19.
Overarching principles
The Code sets out some overarching principles.
The principles require the landlord and tenant to work together to allow for business to recommence at the end of the COVID-19 pandemic. The key principles:
require discussion between the landlord and tenant to achieve satisfactory temporary leasing outcomes;
acknowledge each lease must be dealt with on a case-by-case basis;
require good faith negotiation, transparency and honesty;
require landlords and tenants to assist each other in dealing with other stakeholders, including utility companies and banks;
require the commercial position of each party to be recognised.
This list is not exhaustive and we suggest the Code be considered in each case.
Leasing principles
The Code also includes specific leasing principles to be applied on a case-by-case basis. The key leasing principles are as follows.
Landlords must not terminate the lease due to non-payment of rent during the pandemic or a reasonable subsequent recovery period.
Tenants are not able to terminate a lease under the Code.
Tenants must remain committed to the terms of the lease as re-negotiated under the Code or risk forfeiting the protection of the Code.
Landlords must offer tenants a rent reduction through rent waiver (rent free period) or rent deferrals (rent paid at a later date) proportionate to the reduction in the tenant’s trade.
Rent waivers must be at least 50% of the total reduction in rent payable and subject to the landlord’s position a greater rent reduction can apply.
Any rental deferrals must be amortised over the balance of the lease term or for 24 months, whichever is the greater.
A landlord should pass on to the tenant any reduction in statutory charges or insurance in the appropriate proportion.
A landlord should share any benefit of deferred loan payments with the tenant in a proportionate manner.
Landlords should, where appropriate, waive other expenses or outgoings under leases if a tenant cannot trade. Landlords can also reduce services during this time.
Any repayment of rent or outgoings should occur over an extended period to avoid placing an undue financial burden on the tenant. Repayment should only commence after the COVID-19 pandemic ends (as defined by the Australian Government) including a reasonable subsequent recovery period.
No fees, interest or other charges should be applied with respect to rent which is waived and no fees, charges nor punitive interest may be charged on any deferred charges.
Landlords must not draw on a tenant’s security for the non-payment of rent during this period.
Tenants should be provided with an opportunity to extend a lease for an equivalent period of the rent waiver and/or deferral period.
Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent).
Tenants must not be penalised for reducing opening hours or ceasing to trade due to the COVID-19 pandemic.
What is meant by ‘waiver and deferral’?
A rent waiver is a rent free period – the landlord ‘waives’ completely the tenant’s obligation to pay rent for that period and the rent will not be paid. A rent deferral is when rent is required to be paid at a later date.
In the Code, ‘waiver and deferral’ includes other forms of agreed variations to existing leases, such as pausing or hibernating the lease.
What is the principle of proportionality?
‘Proportionate’ means the amount of rent relief proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period. Reduction in trade is measured based on principles consistent with assessments for eligibility under the JobKeeper program.
Example
A commercial tenant has experienced a decline in turnover of 40%.
The current lease requires rent to be paid of $10,000 per month
Under the principle of proportionality the landlord amends the lease for the period the JobKeeper scheme is active and reduces the monthly lease payable by the tenant to $6,000 per month, with $2,000 per month as a rental waiver and $2,000 per month as a deferred rental payment
The period of rental discount runs for a period of 6 months and over that time $12,000 accrues as a rental deferral
The deferred rent amount is paid over a 24 month period at $500 per month until the deferred amount is cleared, however the tenants and elect to pay the deferred amount earlier if they wish
Can the Parties agree commercial terms different to the Code?
The Code does not prevent the parties from agreeing to any other commercial outcome.
What happens if a landlord and a tenant cannot reach an agreement?
If landlords and tenants cannot reach an agreement on leasing arrangements, a binding mediation process is to be made available in each state or territory.
Questions landlords should ask when providing rent relief to commercial tenants
Will the abatement apply to other costs like outgoings and cleaning charges or only rent? In relation to outgoings, where the mandatory code of conduct applies, there will be a prohibition on landlords passing land tax to tenants (if not already legislated against).
Will there be any circumstances for the unpaid rent to be recouped, for instance, will there be a subsequent repayment plan or if the tenant is subsequently in default?
Will there be any changes to the way in which any existing incentive may be applied?
Will there be any consequential permanent changes to the lease? For example: an extension of the term; an increase in bank guarantee or provision of corporate or personal guarantees, which would needed to be documented in a formal registered variation of lease; or a change to the rent review mechanism.
If rent payments are deferred rather than waived, will the unpaid rent component bear interest? The right to interest will not apply in circumstances where the arrangements are governed by the mandatory code of conduct.
Are there any other conditions attached to the rent relief, such as participation in the “JobKeeper” program or other government assistance?
If insurance proceeds or government assistance become available, will the tenant be required to use those funds to repay the unpaid rent?
How long will the arrangement be in place for?
Is there scope to review the arrangement and in what circumstances?
Will there a relaxation of other lease obligations, such as an obligation to keep trading? In this regard, arrangements governed by the mandatory code of conduct will have protections for tenants who stop trading or reduce opening hours.
The rent relief agreement should be formally documented. This is especially critical for SMSF landlords who are leasing commercial premises to a related party business.
Any permanent changes to the lease (such as an extension of the term) will need to be documented by way of a variation of lease, which can be registered on title if the lease is registered or required to be registered.
How do landlords determine if a tenant has experienced a reduction in business turnover?
In order to obtain rent relief, tenants will need to be willing to “open their books” to the landlord to demonstrate a reduction in business turnover.
Landlords should ask for relevant information which allows the tenant to demonstrate how their circumstances have changed as a result of COVID-19, with comparative data for pre and post 1 March 2020.
Such information might include:
evidence that the business is eligible for the “JobKeeper” assistance and has a turnover of less than $50 million (in which case the mandatory code will apply);
a statement of financial position, outlining income, expenses, assets and liabilities (preferably audited or certified by an accountant), currently and pre-1 March 2020;
year to date and recent financial year financial statements for the impacted location, and guarantor entity:P&L or Income Statement;Balance Sheet;
report from an accountant with evidence that the business has experienced a substantial reduction in its ability to pay rent due to the impacts of COVID-19;
summary of major debt obligations and whether any repayment holidays has been offered by the financier;
other relevant information depending on the nature of the business, for instance, evidence of a decline in sales or loss of clients/projects and the consequential anticipated turnover for the current quarter, which shows how circumstances have changed as a result of COVID-19 since 1 March 2020;
what arrangements are currently in place for the ongoing operation of the business, such as work from home arrangements and whether staff have been stood down; and
whether the tenant holds business interruption insurance that covers the payment of rent and outgoings and if the circumstances for a claim on that insurance have been triggered.
Tenants seeking rent relief will need to be able to justify the relief sought with reference to this information so that the relief is proportionate and reasonable.
Tenants who are transparent and provide compelling information are more likely to be persuasive in their claim for rent relief.