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On 7 April 2020, the National Cabinet’s Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19 was adopted (Code). The Code can be found on the Prime Minister’s webpage here.
The purpose of the Code is to provide a set of good faith leasing principles to help landlords and tenants of SME commercial, retail and industrial premises navigate the difficult task of ensuring that lease arrangements survive the period of the COVID-19 pandemic.
On 24 April 2020 the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulation) commenced in New South Wales in support of the Code. The Regulation will apply until 23 October 2020 (prescribed period) and will be repealed on the following day.
The Regulation is based on the general powers to make regulations set out in the Retail Leases Act 1994 and the Conveyancing Act 1919 and applies to commercial, retail and industrial premises.
The Code is intended to bring a consistent, balanced and national approach to dealing with commercial tenancies and for landlords and tenants to share, in a proportionate manner, the financial risk and cash flow impact during the COVID-19 period.
The Code achieves this by requiring landlords to negotiate with tenants amendments to existing lease arrangements during the COVID-19 Pandemic, including reductions to rent.
The Regulation has sought to adopt the principles set out in the Code in New South Wales in relation to leases in existence prior to the commencement of the Regulation. The Regulation will not apply to new leases entered into after the commencement of the Regulation.
The Regulation will only apply to a tenant if the tenant qualifies for the JobKeeper Scheme and has an annual turnover of less than AUD $50 million. If the tenant is part of a group the turnover threshold will be based on the turnover of the group as a whole whereas if the tenant is a franchisee the turnover will be limited to turnover at the premises. Otherwise it will be based on all turnover in relation to a tenant’s business including turnover in relation to online sales.
To qualify for the JobKeeper Scheme, one of the tests is that the tenant company’s turnover in a particular month or quarter has to have decreased by a set amount (usually 30%) from the same period the previous financial year. There are other alternative tests if the tenant cannot satisfy that test.
The Regulation prevents a landlord taking a prescribed action against any tenant during the prescribed period for a failure to pay rent, outgoings or opening the premises and prevents the landlord from increasing the rent during that period unless the rent is turnover rent. The landlord is further prevented, following the expiry of the prescribed, period from pursuing any rent increase that would otherwise have occurred during the prescribed period.
The prescribed actions include preventing the landlord taking any of the following actions or seeking Court or Tribunal orders to effect any of the following, during the period governed by the Regulation:
- terminating the lease, recovering possession of the premises or otherwise re-entering the premises
- Seeking damages or forfeiting the tenant’s property
- Charging interest or fees in relation to unpaid rent
- Recovery of the whole or any part of the security bond
- Enforcement of any guarantee
- Any other remedy available to a landlord at law.
It is important to note that the landlord is not prevented from taking any of those actions in circumstances where the grounds are not related to the economic impact of COVID-19 such as a tenant damaging the premises.
Where a tenant is an affected tenant either party to a lease may initiate rent renegotiations and renegotiations of other terms of the lease. Those negotiations must be carried out having regard to the economic impacts of the COVID-19 pandemic and in accordance with the principles set out in the Code and are not separately set out in the Regulation. The general principles set out in the Code are:
- Landlords must offer tenants reductions in rent in the form of waivers and deferrals, proportionate to the reduction in the tenant’s trade during the pandemic period and must take into account a subsequent recovery period;
- Rent waivers must constitute no less than 50% of the total reduction in rent;
- Payment of rent deferrals by the tenant must be amortised over the greater of the balance of the lease term and a period of no less than 24 months, unless otherwise agreed by the parties and must not commence earlier than the end of the pandemic period unless the lease ends prior to that in which case they can commence at the end of the lease;
- The landlord should seek to share any benefit it receives of deferred loan payments with the tenant on a proportionate basis; and
- Where appropriate, landlords should waive other expenses or outgoings if a tenant cannot trade under the lease and for the duration of the COVID-19 pandemic. Landlords are however entitled to reduce services during that period as well.
Any reduction in statutory charges (eg land tax,
council rates) or insurance will be passed onto the tenant in the appropriate
proportion applicable under the terms of the lease, even if the tenant pays a
fixed charge rather than a proportion of the charges.
The Regulation prevents an act or omission required as a result of COVID-19, such as a closure of the premises, from being a breach of the lease or otherwise being grounds for termination of the lease, unless both parties agree.
Disputes must be submitted to mediation in the first instance.
The Regulations can be found here.
How can we help?
All landlords and tenants to which the Code and the Regulation applies must understand restrictions and principles outlined in the Code and Regulation. These restrictions and principles should be used in negotiating a mutually acceptable arrangement.
For further advice on compliance with the Code, or a commercial strategy in respect of your lease or leasing portfolio, please contact Sara Hatcher.
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