SME Commercial Leasing Principles During COVID-19

 

On 7 April 2020 the Federal Government announced a mandatory Code of Conduct that applies to commercial leases vested in eligible small to medium-sized tenants (SME’s.)

Purpose of the Code

The Federal Government introduced the SME commercial leasing code of conduct to:

  • Impose a set of good faith leasing principles on landlords and tenants when dealing with commercial tenancy negotiations during COVID-19 and any reasonable recovery period.
  • Share the financial risk & cash-flow impact of COVID-19 between landlords and tenants in a proportionate and measured manner
  • Achieve an appropriate balancing of landlords and tenants interests. 

Who does the Code Apply to?

The Code applies to all commercial leases where the tenant;

  1. Has a turnover below $50 million a year, and
  2. Is eligible for the JobKeeper program.

Start Date

3 April 2020

Duration

The period during which the JobKeeper program remains operational

Overarching Principles

Landlords and tenants:

  • share a common interest in working together
  • Where appropriate Landlords and tenants will be required to negotiate temporary leasing arrangements
  • Landlords and tenants will negotiate in good faith.
  • Landlords and tenants will act in an open, honest and transparent manner, and provide sufficient and accurate information
  • Agreed arrangements will be proportionate and appropriate based on the impact of the COVID-19
  • Landlords and Tenants will assist each other in their respective dealings with other stakeholders
  • It is not possible to form a collective industry position. The Competition and Consumer Act 2010 will still apply to actions under this Code
  • The risk of default must continue to be borne by the landlord
  • All leases must be dealt with on a case-by-case basis

Leasing Principles

Tenants must

  1. Continue to pay rent where possible
  2. Remain committed to the terms of their lease (subject to agreed amendments)

Landlords must:

  1. Offer tenants a proportionate reduction in rent in the form of waivers and deferrals of up to 100% of the total rent payable
    • “Rental waivers” must be at least 50% of the total reduction in rent
    • “Rental Deferral” payments must be amortised over the remaining lease term and for a period of no less than 24 months, whichever is the greater
  2. Where appropriate, waive “outgoings” charges – in some circumstances landlords will reduce services to reduce outgoings
  3. Provide tenants with the opportunity to extend their lease on existing terms for an equivalent period of the rent waiver and/or deferral repayment period.
  4. Pass on all COVID-19 related benefits e.g. deferral of loan payments

Landlords must not:

  1. Terminate leases due to non-payment of rent
  2. Increase rents (excluding turnover rents)
  3. Impose penalties for tenants that stop trading or reduce opening hours
  4. Pass on the cost of land tax to tenants
  5. Charge interest on unpaid rent
  6. Make a claim against lease guarantees such as bank guarantees, personal guarantees, bonds etc

What if Landlords and Tenants are unable to agree terms?

Either party can refer the matter to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation

Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.

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This summary does not constitute professional advice and should not be relied upon as such. It is intended only to provide a general overview and it is not intended to be comprehensive. You should seek professional advice before acting or relying on any of the content.

Downloads

For ease of reference, we have provided links below to download the following files:

  1. An infographic that summarises this page, and –
  2. A copy of the original Leasing Code of Conduct released by Federal Cabinet
COVID-19 Commercial Leasing Code of Conduct
Infographic: COVID-19 Commercial Leasing Code of Conduct