ASCA COVID-19 Mandatory Code of Conduct – Commercial and Retail Leases

Prime Minister Scott Morrison confirms the creation of a mandatory code of conduct in relation to commercial and retail leases.

Updated National Cabinet Documentation

To impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants.

Applies to all SME tenants. That is, any tenant suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s jobkeeper programme, with an annual turnover of up to $50 million.

To share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords.

In negotiating and enacting appropriate temporary arrangements under this Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis:

  1. Landlords must not terminate leases due to non-payment of rent
  2. Tenants must remain committed to the terms of their lease (as amended)
  3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of between 50% and 100% of the amount ordinarily payable
  4. Repayment of deferred rent must be spread out over the balance of the lease term or over 2 years (whichever is longer)
  5. Repayment should not start until the Government declares the pandemic over, or when the lease expires
  6. Landlord to pass on proportionate reductions in statutory charges (e.g. Land tax, council rates), insurance premiums or deferral of loan payments by banks
  7. Landlords to waive outgoings and/or reduce services where possible
  8. Landlords must not charge fees, interest or other charges in respect of waived rent
  9. Landlords can’t draw on a tenant’s security for the non-payment of rent
  10. Tenants to be given the opportunity to extend leases for the deferral period
  11. Freeze on rent increases (except for retail leases based on turnover rent)
  12. Tenants may reduce opening hours or cease to trade due to the COVID-19 pandemic without penalty by landlords
  13. If the parties can’t reach an agreement, matter to be referred for binding mediation.

From 3 April 2020 at the earliest (check state or territory)

For the period during which the Commonwealth JobKeeper program remains operational.

How does a landlord determine if a tenant has experienced a reduction in business turnover?

Landlords will ask for relevant information which allows you to demonstrate how your 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 
  • year to date and recent financial year financial statements for the impacted location, and guarantor entity:
    1. P&L or Income Statement;
    2. Balance Sheet;
  • summary of major debt obligations and whether any repayment holidays has been offered by the financier;
  • 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.

What could be asked for, but isn’t necessarily allowed under the Code’s Overarching Principles due to the onerous financial burden put on the tenant to procure them.

  • Demands for an accountant or financial adviser report with evidence that the business has experienced a substantial reduction in its ability to pay rent due to the impacts of COVID-19; 
  • Demands for information to only audited or certified by a chartered accountant
  • 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;
  • 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.

How will the rent relief be structured?

The following scenarios are examples only, noting the circumstance of each landlord, SME tenant and lease are different, and are subject to negotiation and agreement in good faith.

Examples of practical variations reflecting the application of the principle of proportionality may include, but are not limited to:

Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis.

ie. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.

  • At a minimum, half is provided as rent-free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.
  • Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties
    1. Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.
    2. So if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent-free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent-free/rent waiver and the remainder is rent deferral.
  • The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.

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