Mandatory Code of Conduct: Commercial Leasing Principles during COVID-19
Purpose of the code • The Code imposes a set of good faith leasing principles in relation to commercial leases (including retail, office and industrial). • The Code applies to “eligible business” – Commonwealth JobKeeper programme, less than $50 million • The good faith negotiation obligation, also applies to businesses that are not “eligible businesses”. • The Code introduces a moratorium on evictions for all commercial tenants in financial distress who are unable to meet their commitments due to the impact of COVID-19 pandemic. • The Code is designed to provide a consistent national approach.
Terms used in the Code Common Terms • “Must” • “Should” • “Turnover” • “Revenue” • “Proportionality Principle” • An eligible business – a tenant whose business qualifies for the JobKeeper Programme. • Covid-19 pandemic period (“CPP”) – defined by the term of the JobKeeper programme or as extended by the Australian Government.
Commencement Date • Commencement date not yet known. • The Code will be implemented by Regulation and will come into effect on a date specified in the Regulation – But not before 3 April 2020. • Code will be operative for the duration of the Commonwealth JobKeeper programme.
Key principles • To share in a proportionate and measured manner, the financial risk and cash flow impact during the Covid- 19 period whilst seeking to balance the interests of tenants and landlords. • The “Covid-19 period” – defined as the term of the JobKeeper Programme or as extended by the Australian Government. • To qualify, Tenant must be suffering financial stress or hardship as a result of the Covid-19 pandemic. • The Code encourages negotiations to be conducted on a case by case basis and encourages parties to agree to tailored and bespoke arrangements . • Requires parties to act in good faith in an “open and honest manner”. • The principles in the Code do however impose minimum requirements.
Code Application and Eligibility criteria • Applies to all commercial tenancies (retail, office and industrial): To be an “eligible business” for the Code protections, the tenant must be: – eligible for the Jobkeeper program; – have a turnover of less than $50 million; – have a 30% or greater loss in revenue/turnover! • The Code does however state that even if tenants do not meet this criteria, it should apply “ in spirit ” to all leasing arrangements for affected businesses.
Proportionality principle Landlords must offer tenants proportionate reductions in rent payable in the form of: • waivers; and • deferrals of the amount ordinarily payable based on the reduction in the tenant’s trade. Rent waivers and deferrals may be up to 100%. “Rental waiver” means the rent payable is reduced in accordance the Code (Regulation) and by agreement with the Tenant. “Rent deferral” means the rent payable, that falls due after the Covid-19 period.
Rental waivers Rental waiver must: • constitute a minimum 50% of the total reduction in the rent payable under the Proportionality Principle; and • should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. ( Subject to the landlord’s financial capacity and ability to provide such additional waivers). Tenants may waive the requirement for a 50% minimum waiver by agreement. Note: Appendix 1 of the Code forms part of the Code. Sets out the formula by example.
Rental deferrals Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of not less than 24 months, whichever is the greater. Example 1 Remaining lease term is 14 months. Payment of deferred rent must be 24 months even though lease will expire in 14 months. Example 2 Remaining lease term is 36 months. Payment of deferred rent must be 36 months.
Example scenario 1 • Tenant states/proves a downturn of trade of 100%. • Total rent payable is $10,000 per month. • The rent payable by the tenant will reduce to zero during the Covid-19 period. • At least 50% of that reduction ($5,000) must be waived by the landlord. • The remaining $5,000 is deferred rent and will be payable by the tenant (post the Covid-19 period or expiry of the existing lease, whichever is earlier) over the balance of the lease term or over 24 months, whichever is the greater. Refer also to example in Appendix1 of the Code Note: Appendix 1 of the Code forms part of the Code. Sets out the formula by example.
Example scenario 2 • Tenant states/proves a downturn of trade of 30%. • Total rent payable is $10,000 per month. • The rent payable by the tenant will reduce to 70% ($7,000) during the Covid-19 period. • At least 50% of that reduction ($1,500) must be waived by the landlord. • The remaining $1,500 is deferred rent and will be payable by the tenant (post the Covid-19 period or expiry of the existing lease, whichever is earlier) over the balance of the lease term or over 24 months, whichever is the greater. Refer also to example in Appendix 1 of the Code
Outgoings, statutory charges & general expenses • Landlords should seek to waive recovery of any outgoings or other expenses during the period the tenant is not able to trade. Landlords have the corresponding right to reduce services as required in such circumstances. • Any reduction in statutory charges (e.g. land tax, council rates) or insurance etc is to be passed on to the tenant in the appropriate proportion applicable under the terms of the lease. • Landlords should also seek to share any benefit they receive due to deferral of loan payments with the tenant in a proportionate manner.
Prohibited actions and activities The Code introduces a prohibition on the following during the COVID-19 pandemic period and/or reasonable subsequent recovery period: • termination of leases for non-payment of rent; • rent increases (however, turnover based rent can be collected from successfully trading retail tenants); • claiming on a bank guarantee or security deposit for non-payment of rent; • charging fees, interest or other charges on unpaid/deferred rent or outgoings; • any levy or penalties if tenants reduce opening hours or cease to trade due to the COVID-19.
Repayments Repayments should be offered over an extended period (note: minimum 24 months) in order to avoid placing an undue financial burden on the tenant. Repayments should not commence until the earlier of: • COVID-19 pandemic period ending (as defined by the Australian Government) or • the existing lease expiring, and taking into account a reasonable recovery period.
Ongoing tenant obligations • Tenants will still be required, subject to the Code and negotiated outcomes, to comply with their contractual obligations. • Importantly, the Tenant will forfeit the protections of the Code for a material breach of the substantive terms of the lease.
Mediation • Where landlords and tenants cannot reach agreement on leasing arrangements the matter is to be referred to mediation. • Mediation will be binding! • The mediation services will be provided by the N.S.W Small Business Commissioner.
Where to now? • Read the REINSW fact sheet and the Code itself. Both available on the REINSW website. • Advise/prepare your clients. • Recommend that your clients seek financial advice and assistance. Be careful not to provide financial advice or engage in activity that may constitute the provision of financial advice. You should also recommend your clients seek independent legal advice, particularly where formally documenting an agreement. • Start acting now and be ready for the Code. • Stay tuned to REINSW for more information.
Disclaimer The information in this presentation is of a general nature and is not intended to address the circumstances of any particular individual, or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this presentation is accurate at the date it is received or that it will continue to be accurate in the future.
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