The Morrison government has finalised its long-awaited rent relief package for commercial tenants, outlining a plan that will force landlords to grant rent reductions to small businesses under a mandatory code of conduct.
Prime Minister Scott Morrison confirmed the code will be legislated by state and territory governments, reaffirming his desire for tenants and landlords to negotiate among themselves to achieve mutually beneficial outcomes.
The mandatory code, which is the product of several weeks of negotiation between industry players and government officials at the federal and state levels, sets out the rules under which small businesses are expected to undertake these “good faith” negotiations.
Please find following the code of conduct they will need to be considered.
Will my landlord reduce my rent bill?
Landlords cannot refuse requests for rent relief to SME tenants that are eligible for the JobKeeper scheme. Waivers and deferrals will be negotiated individually but must follow the terms of the mandatory code.
The mandatory code of conduct signed off by National Cabinet includes a provision that will force commercial landlords to accept rent reductions in proportion to a tenant’s decline in turnover due to the COVID-19 pandemic.
This will be achieved through a combination of rent waivers and deferrals, and only apply to SMEs eligible for the JobKeeper scheme.
Tenants are being encouraged to share turnover information with landlords to enable negotiations about how big rent reductions should be, although the federal government has been clear this measure does not remove a tenant’s obligation to honour the terms of their lease.
Landlords are required to offer tenants at least 50% of their rent relief as waivers “over the course of the pandemic period” and the remainder in deferrals.
Deferrals are required to be covered over the balance of a tenant’s individual lease term, meaning for example, tenants with three years left on their lease will be able to gradually pay deferred rent over the course of their agreement.
Those with less time on their leases, for example six months, will have two years after the pandemic period is over to pay deferred rent.
How do I know if I’m eligible to negotiate under the code?
Only businesses eligible for JobKeeper payments can negotiate under this code. Those unsure whether they are eligible for JobKeeper should apply via the Australian Taxation Office and will likely find out within the next two-to-three weeks.
Only small and medium businesses with $50 million in annual turnover or less, which are eligible for the JobKeeper wage subsidy scheme, can negotiate under the protections in this new code.
Everyone else is expected to pay their rent as normal and won’t be able to negotiate with landlords under the terms described above.
The strict eligibility criteria for the JobKeeper scheme involves showing your turnover has declined at least 30% on a comparable period a year ago, of at least a month. Although there is some wiggle room in the form of tax office discretion.
Can my landlord evict me? Even after the COVID-19 pandemic?
Your landlord cannot evict you for non-payment of rent during the pandemic period, and must comply with the eviction moratorium, slated to last six months.
National Cabinet agreed to a nationwide moratorium on evictions which means small and medium business tenants cannot be evicted from their premises for a period of six months.
The mandatory code includes a provision that will prohibit landlords from terminating leases or padlocking stores for the non-payment of rent.
The Morrison government has been clear it expects tenants to honour the terms of their lease and pay rent where possible.
But the intention of the code is to prevent landlords from evicting tenants for non-payment of rent during the pandemic period after the moratorium expires in six months.
Can my rent increase during the pandemic?
Rent increases have been frozen throughout the pandemic period, and all additional penalties are gone too.
The mandatory code includes a specific provision that freezes rent increases, except in the case of turnover leases.
Commercial landlords are also prohibited from charging penalties to tenants who stop trading or reduce their opening hours over the course of the pandemic.
Landlords are also banned from passing on land tax to tenants and from charging interest on unpaid rent.
After the pandemic period ends landlords are free to resume rent increases along the terms outlined in individual lease agreements.
Who is enforcing this? What if my landlord doesn’t cooperate?
Binding mediation will enforce breaches of the code, but it will look different depending on where your business is based.
State and territory governments are ultimately responsible for commercial tenancy arrangements, which is why each jurisdiction must pass their own law giving effect to the mandatory code of conduct.
Enforcement will also be left up to the states and will be overseen through a binding mediation process. But this will be different in each jurisdiction across the country.
What are the actual provisions under the mandatory code of conduct?
- The code was published by the federal government on 3rd April 2020 on the following principles:
Where it can, rent should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome;
- There will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between landlords and tenants;
- There will be a prohibition on termination of leases for non-payment of rent (lockouts and eviction);
- There will be a freeze on rent increases (except for turnover leases);
- There will be a prohibition on penalties for tenants who stop trading or reduce opening hours;
- There will be a prohibition on landlords passing land tax to tenants (if not already legislated);
- There will be a prohibition on landlords charging interest on unpaid rent;
- There will be a prohibition on landlords making a claim to a bank guarantee or security deposit for non-payment of rent; and
- Any legislative barriers or administrative hurdles to lease extensions will be removed (so that a tenant and landlord could agree a rent waiver in return for a lease extension).
Commercial rent relief code revealed
The government has unveiled its previously announced commercial leasing code of conduct, which aims to protect tenants and landlords facing financial hardship amid COVID-19.
The federal government has announced the release of its mandatory code of conduct for commercial leasing principles, in order to protect the interests of both tenants and landlords navigating the economic downturn resulting from COVID-19.
According to the code itself, its purpose is to “impose a set of good faith leasing principles” to be applied temporarily, for the duration of the pandemic period, and assist in balancing the interests of both landlords and tenants.
As announced by Prime Minister Scott Morrison, the mandatory code will be legislated and regulated “as appropriate” by each state and territory individually and is “not intended to supersede” state legislation on leasing matters but complement it for the duration of the crisis.
The mandatory code will apply to tenancies whereby the tenant or landlord is eligible for the JobKeeper program, according to Mr Morrison, being a commercial business in a position of distress, with an annual turnover of $50 million or less.
Key aspects of the new code include making it ineligible for the landlord to terminate a tenancy or draw on a tenant’s security should that tenant’s revenue take a hit during the pandemic, as well as reasonable rental waivers and deferrals that are proportionate to the loss in revenue seen by the tenant.
Further, landlords will be expected to pass on any benefits or reductions they are offered, including mortgage freezes, while reduced statutory charges, including land tax or insurance premiums, should also be passed on in appropriate proportion to the tenant.
Rental reductions and waivers should exceed 50 per cent of the total rental amount and be proportionate to the revenue loss of the tenant, and no fees, interest or other charges should be imposed on tenants requiring rental waivers or deferrals, it has been revealed.
The new code includes the provision of mediation services under the relevant state and territory jurisdictions, for cases in which the landlord and tenant cannot meet an appropriate agreement under the code.
Any decision made on matters under official mediation will be binding, and interested parties are also discouraged by the government from utilising the mediation process in order to drag out dispute proceedings.
The Prime Minister noted that residential tenancies, which are not covered under the code, will also be subject to regulation by the states individually, and that the national moratorium of evictions will be the only protection offered to residential tenants at the federal level.
The leasing principles of the code are as follows:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this code.
- Landlords must offer tenants proportionate reductions in rent payable (in the form of waivers and deferrals) of up to 100 per cent 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.
- Rental waivers must constitute no less than 50 per cent of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50 per cent minimum waiver by agreement.
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- 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.
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other landlords, with the tenant in a proportionate manner.
- Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
- If negotiated arrangements under this code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian government) or the existing lease expiring and taking into account a reasonable subsequent recovery period.
- No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above, and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
- Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
The code of conduct comes into effect immediately.
As always please do not hesitate to contact us to review your situation and determine what action is required. We can be reached, as always on our office number (02) 4958 1829 or at email@example.com.
David O’Brien FIPA CTA FIFA NTAAF