Mark Story | April 2020
This article was current at the time of publication.
Designed to take a “we’re-all-in-this-together” approach, the Mandatory Code of Conduct introduced by the Australian Government on 7 April 2020 establishes principles to help parties either side of the leasing divide successfully navigate their way through the coronavirus downturn.
The new code applies to SMEs (individuals, businesses or companies) unable to meet their tenancy commitments due to “financial stress or hardship” caused by the COVID-19 pandemic.
The code applies to tenants eligible for the JobKeeper payment (threshold 30 per cent drop in turnover) and those with an annual turnover of up to $50 million (SMEs).
Provisions under the new code attempt to ensure that all parties under commercial tenancy arrangements share the burden (financial risks and cash flow impacts) of surviving the COVID-19 pandemic, with a view to resuming normal business when it’s over.
Good faith provisions
The code also aims to deliver numerous “good faith” leasing principles as the basis for negotiating new commercial tenancies (including retail, office and industrial) between owners, operators, other landlords and tenants. Within the context of these negotiations, each party must provide each other with sufficient and accurate information.
However, before the code becomes enforceable, it still needs to be incorporated into the existing legislative and regulative framework of each state and territory.
At the time of writing (30 April 2020), New South Wales was the only state to show its hand, having completed its own regulations on 24 April 2020, and in line with the national code.
Once this is done, all eligible tenants will be entitled to receive relief via waivers or deferrals of rent for the duration of the COVID-19 pandemic.
At least 50 per cent of that relief takes the form of a rent waiver. The rent that is deferred is then payable after the COVID-19 pandemic and potentially spread over two subsequent years.
For example, a 60 per cent reduction in tenant turnover would result in a 30 per cent rent reduction and 30 per cent in deferred rent, paid at the end of the recovery period.
What landlords and tenants should do
Rather than waiting for states and territories to pass legislation, Chris Wheeler, partner at King & Wood Mallesons, says most tenant clients are already engaging with landlords, together with their accountants, lawyers, lenders and other representative bodies.
In addition to being consistent with their advice, Wheeler suggests accountants remind clients that to receive rent relief within the code they need to have successfully applied for JobKeeper payments.
While there is no guidance within the national code as to how SMEs need to clarify the evidence point, Wheeler suspects payment of the (wage) subsidy will be an important tool of proof.
“Clients also need to recognise that material failure to comply with substantive lease terms will result in a forfeit of the protections provided by the code,” warns Wheeler.
“Just because a landlord may have agreed to reduce and defer, say, 50 per cent of the rent, doesn’t mean the tenant can go rogue.”
For example, if a tenant ignored the permitted use of the lease or decided to use someone else’s premises or additional area in addition to their own, or decided to transfer the lease without getting landlord approval – when the lease obliged them to – the landlord could take lease enforcement action.
It remains unclear if agreements negotiated prior to the announcement of the code will hold water until each state and territory enacts its new law. However, Wheeler reminds all parties that the code expects the impact to be assessed at a commercial tenant’s group level.
The code is also unclear when it comes to aggregating revenue within a corporate group. However, under new New South Wales regulations (for assessing revenue/turnover), if the lessee is a corporation then the whole group's revenue applies.
For example, if one store’s turnover is down 80 per cent, but 30 per cent at the group level (including online sales), it’s the latter figure that’s used to assess the degree of the rent relief.
But if the lessee is a franchisee, relevant revenue is only that associated with the particular premises. In other words, it matters not that the franchisee may have several outlets – they are not aggregated.
For cases which are neither corporations nor franchisees, in New South Wales the revenue of the “business of the lessee” is what is taken into account, and may include Australia-wide, global or internet sales.
While it’s unclear how accurate the financial data provided by tenants will be, or what financial information landlords can ask for, Wheeler suspects they’ll want to see financial statements, GST BAS statements and cash reserves on balance sheet at the group level.
However, if the New South Wales regulations – which talk about parties having to negotiate in light of the economic impacts of the COVID-19 pandemic and the code principles – are any proxy, there’s going be a major reliance on trust when it comes to providing evidence and negotiating the right amount of rent relief.
“While cash flow considerations will be paramount for accountants, they will also want to advise [tenant] clients of the opportunity to rewrite leases so that better long-term deals can be negotiated,” Wheeler says.
“It’s also incumbent on accountants to remind [landlord] clients that by negotiating in good faith, they’ll maximise the likelihood of tenants surviving the COVID-19 pandemic, and therefore avoid having vacant premises.”
Given that they’re sandwiched between both parties to a lease agreement, Wheeler also urges accountants to check any potential role for lenders when clients negotiate new agreements with landlords.
He suggests checking loan facility arrangements and any covenants that may impact future negotiations.
“If negotiations guided by the code’s principles are unsuccessful, you can refer the matter to the applicable retail/commercial leasing dispute resolution processes for binding mediation in your state or territory,” says Wheeler.
“Given that COVID-19 issues are unlikely to be covered by insurance, you should also encourage clients to contact their [insurance] provider to discuss their options.”
What landlords and tenants must do
Commercial landlords must:
- comply with the terms of their lease subject to the negotiated changes
- not draw on a tenant’s security for the non-payment of rent during the pandemic period or the subsequent recovery period
- offer proportionate rent reductions in the form of waivers and deferrals up to 100 per cent of the amount ordinarily payable
- not impose fees, interest or charges on rent waivers or fees, or charges or punitive interest on rent deferrals
- not terminate a lease for non-payment of rent during the pandemic period or the subsequent recovery period
- pass on relief from their obligations to pay land tax, council rates or insurance premiums proportionately to tenants.
- honour and uphold their obligations under the lease
- remain committed to the terms of their lease
- provide accurate turnover figures and other relevant financial statements.
CPA Australia’s COVID-19 support pages provide extensive, up to date advice and information for our industry.
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