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Un-Legislated – Further Clarification – Commercial Tenancy

To our valued clients,

Further clarification has been provided regarding commercial tenancies for Landlords and Tenants.

Please do not hesitate to contact our 4Front Team at info@4front.net.au or 07 3245 9966 if you have any questions or require further assistance.

 

Covid-19 Mandatory Code – Commercial Tenancies

The Federal Government recently announced a Mandatory Code of Conduct for SME commercial leasing principles in response to the ongoing COVID-19 pandemic, aimed at providing a framework for both tenants & landlords to resolve how the financial burden of the pandemic should be shared between them.

It is intended that landlords and tenants negotiate existing lease arrangement in good faith for the duration of the pandemic to do all possible to ensure that both the tenant has a place of business and the landlord some cashflow for their investment.

Whilst the code is effective now and will operate for the same period as the JobKeeper Program, most states, including QLD are yet to confirm on how they propose to administer the code.

 

Which Tenants are protected by the code?

The Code applies to ‘SME tenants’, defined as businesses who:

  • have an annual turnover of up to $50 million; and
  • are eligible for the Commonwealth’s JobKeeper program.

To be eligible for the JobKeeper program, a business must have suffered a fall in turnover of more than 30 per cent for at least a month. Notably, businesses only need to demonstrate their eligibility for the program, meaning it is not necessary that a business already be receiving
JobKeeper payments.

The Code requires that both landlords and tenants act in an open, honest and transparent manner. Each will need to provide sufficient and accurate financial information within the context of negotiations and accordingly, landlords will be within their rights to request this information to prove such claims.

 

TENANTS

Tenants are entitled to a reduction in rent proportionate to the decline in their turnover during the pandemic period and a reasonable subsequent recovery period. Rent reductions may consist of a combination of waivers and deferrals in accordance with the following requirements:

  • rental waivers must comprise no less than 50 per cent of the total rent reduction allowed to the tenant under the proportionality principle (unless waived by the tenant)
    payment of rental deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater (unless otherwise agreed by the parties)
  • Where appropriate, landlords should waive recovery of other expenses, such as outgoings, during the period that tenants are unable to trade. In these circumstances, the Code notes that landlords reserve the right to reduce services as required.

It is also important to note that no fees, interest or other charges may be applied to waived or deferred rent.

The Code is expressly designed so that landlords and tenants can tailor their approach to rent relief to their own circumstances, seeking to avoid placing any undue financial burden on tenants, and providing them with an opportunity to extend their lease on existing lease terms, during the recovery period after the pandemic ends. Again, the aim is to ensure both that the tenant has a place of business and the landlord some cashflow for their investment.

 

Protections for Tenants

Tenants who are covered by the Code will be protected from the following:

  • lease termination for non-payment of rent (lockouts and eviction)
  • rent increases (except for new leases)
  • penalties for stop in trade or reduced opening hours
  • landlords making a claim on a bank guarantee, cash deposit, personal guarantee or other security for non-payment of rent

 

Landlords must pass on Savings

The Code requires landlords to share with tenants the benefit of loan deferrals and relief from statutory charges such as rates and land tax. Specifically:

  • any benefit from the deferral of loan payments provided by a financial institution
  • any reduction in statutory charges or insurance in the appropriate proportion applicable under the terms of the lease.

One of the overarching principles of the Code is that parties must act in an honest and transparent manner and will each provide sufficient and accurate information within the context of negotiations so landlords should consider whether it is appropriate to provide tenants with details of any relief they receive in relation to tax or loan repayments.

 

LANDLORDS

One of the key issues landlords face in these negotiations will be how to account for the potential of fluctuations in the tenant’s revenue during the pandemic. If things improve quicker than expected, the tenant may enjoy a return to an equal footing earlier than expected. Again, in the interests of acting in an open, honest and transparent manner landlords may consider requesting a mechanism that allows agreed rent reductions to be adjusted as trading conditions change.

Where landlords plan to shut down a building or stop providing certain services they should check their lease to ensure they are not in breach of any covenants and seek waivers from tenants where appropriate.

The most significant benefit for landlords is that tenants cannot terminate their lease. The Code is not a ‘get out of jail free card’ and reaffirms that tenants must remain committed to the terms of their lease. Material failures to abide by the terms of their lease will most likely see tenants forfeit any protections provided by The Code.

 

Worked Example of Proportionate Rent Reduction

ABC Retail Co pays monthly rent to Big Shopping World of $10,000, and during the pandemic has suffered a 60 per cent decline in turnover. They will be entitled to a rent reduction of $6,000 consisting of:

  • a rental waiver of no less than $5,000 per month
  • a deferral of the balance of the rent reduction to be repaid over at least a 24-month period, regardless of their remaining lease term

 

More Information

For more information on the above, or other legal issues facing landlords and tenants we strongly encourage you to speak with your solicitor.

If you need to engage a solicitor, we have several who are experts in this field that we have long-term working relationships with. Please contact our 4Front team on 07 3245 9966 for further details.

If you require assistance to review the financial position of your tenants or assistance with providing information to your landlord please contact your 4Front Team at info@4front.net.au or on 07 3245 9966.

 

Carmine, Drue and the 4Front Team

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