SME Commercial Leasing Principles Code of Conduct.

The Federal Government has announced a rent relief package for commercial tenants affected by COVID-19. The package is a key part of the government’s hibernation strategy.

Under the scheme, landlords will be instructed to reduce their commercial tenant’s rent in proportion to the tenants lost revenue due to the impact of COVID-19. These principles will apply to negotiating amendments in good faith to existing leasing arrangements – to aid the management of cashflow for SME tenants and landlords on a proportionate basis.

In short, if you have less than $50 million in revenue and are eligible for the JobKeeper programme, then the code should be applied to you as a tenant.

The code, which came into effect on 3rd April 2020, will be rolled out and implemented in each state and territory and also stipulates:

  • landlords and tenants will each provide sufficient and accurate information within the context of negotiations
  • landlords must not terminate the lease or draw into a tenant’s security bond
  • likewise, tenants must not terminate the lease
  • no fees, interest or other charges should be applied with respect to rent waived
  • there is a freeze on rent increases

Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

The waivers will have to account for 50% of the reduction in business, and deferrals which are payments that will need to be paid but can be put off, must be spread over the remaining lease term, but for no less than 24 months.

For example:

If the tenant’s revenue has fallen by 60% this would result in a guaranteed 60% cash flow relief by the landlord.
• At a minimum, half (or 30%) is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.
• Up to half ( or 30%) 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

Plus, any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.

Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes.

The purpose of the code is to impose a set of good faith leasing principles to commercial tenancies (including retail, office and industrial) between owners, operators, landlords and their tenants.

Prime Minister Scott Morrison said of the scheme: “This preserves the lease, it preserves the relationship, it keeps the tenant in the property.”

The National Cabinet also expects Australian and foreign banks, along with other financial institutions operating in Australia to support landlords and tenants with appropriate flexibility as the code is implemented.

As you can see, this a quite a favourable result for tenants in business. Unfortunately, there has been no guidance given for residential rent arrangements, so we encourage all landlords and tenants to discuss their situation on a case by case basis.

Click here for more information on the SME Commercial Leasing Principles Code of Conduct.