COVID-19 – Government Announces Major Changes to Commercial Leasing Arrangements

Yesterday the Federal Government released the National Cabinet Mandatory Code of Conduct which provides a set of good faith leasing principles to aid the management of cashflow for SME tenants and landlords on a proportionate basis during COVID-19.

A link to the Code is here: https://www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf

It was no secret that the National Cabinet was plagued with difficulties in producing this Code, and the Code notes that it was not possible to form a ‘collective industry position’.

The overarching principles are set out as being: to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period…. with tailored, bespoke and appropriate temporary arrangements.

Who does the Code Apply to?

The Code applies to SME tenants (commercial not residential) defined as all tenancies:

• suffering financial stress or hardship as a result of the pandemic;
• as defined by their eligibility for the Commonwealth JobKeeper programme (ie 30%  reduction in turnover as a result of COVID-19); and
• with an annual turnover of up to $50 million.

Some of the obligations in brief:

Obligations on the Landlords

The obligations on the landlord are set out in the Code, but include:

• must offer tenants proportionate reductions in rent;
• reductions are to be in the form of waivers and deferrals of up to 100% of the amount ordinarily payable;
• rental waivers must constitute no less than 50% of the total reduction in rent payable;
• must pass on in an appropriate proportion, any reduction in statutory charges (land tax, council rates);
• agree to freeze on rent increases;
• must not draw on tenant’s security bonds/bank guarantee or personal guarantee; and
• must not penalise tenant for a reduction in opening hours or cessation of trade.

Obligation on Tenants

As for the tenants, they must:

• meet the ‘SME Tenant’ criteria as per above;
• remain committed to the terms of the lease (subject to negotiated amendments); and
• have regard for the landlord’s financial ability to provide such additional waivers and may waive the requirement for a 50% minimum waiver by agreement.

The above is not exhaustive and the Code sets out an example in its Annexure for some practical guidance.

What about after COVID-19?

Where a negotiated arrangement is made under the Code, which requires repayment, such is to occur over an extended period and is not to commence until the earlier of:

• the end of the COVID-19 pandemic; or
• the existing lease expiring.

How is this to be negotiated?

The Code provides for a set of governing principles over commercial tenancies and will be in place for the period during which the Commonwealth JobKeeper program remains operational. It will be supported by state based Industry Code Administration Committees with an Independent Chair appointed by each relevant State /Territory Government.

Where agreements cannot be reached between the SME Tenant and the Landlord privately (with or without the assistance of professional services advisors such as your lawyer or accountant) then it should be referred to a dispute resolution process for binding mediation.

Where to from here?

There remains an elephant in the room. It is big, and it creates a financial pressure for the landlord which will impact the landlord’s ability to come to the table in the spirit of cooperation that the Government is seeking. That is of course, the banks.

Highlighting an obligation of the tenant to ‘have regard for the landlord’s financial ability to provide waivers’ is not going to necessarily assist in reaching an outcome. The landlord and tenant at that negotiation table, even if fully aware of the competing pressures and frustrations, and even acknowledging the close alignment of their interests to make this work, are both in a fight for survival.

The next code or set of binding principles will need to address the roles of financial institutions and put them at the table with the landlords and SME tenants.

For now, contact a member of our team at Cronin Miller Litigation for guidance in engaging with your landlord, or your tenant, or even your bank. Dispute resolution techniques are invaluable here and professional assistance is going to maximise the prospects of a fair outcome in a good faith negotiation.

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