A clear framework for negotiations: SME Commercial leasing principles code of conduct update (Part 1)

The Federal Government announced this week a SME Commercial Leasing Principles Code of Conduct ("the Code") to assist tenants with loss of revenue as a result of the COVID-19 pandemic. The Code intends that landlords will agree on temporary arrangements for each tenancy based on good-faith* leasing principles and proportionality.

Since the COVID-19 crisis escalated last month, many tenants had already commenced negotiations with landlords regarding rent reductions but now the Code gives the parties a clear framework going forward with these negotiations.

Who does the Code apply to?

The Code applies to commercial tenants with an annual turnover of $50 million or less who have experienced a 30% or greater loss in revenue and where the tenant is participating in or will participate in the JobKeeper Program.

The parties to the Code agree that the principles of the Code should apply to all leasing arrangements for affected businesses, having regard to the size and financial structure of the business.

What Relief is Available to Commercial Tenants

1. Landlords are expected to negotiate in good faith* to share the pain experienced by tenants in the current economic climate.
2. Rent relief should be proportionate to the reduction in turnover (up to 100%) and will be in the form of waivers and deferrals
3. Waivers must account for at least 50% of the reduction in turnover, meaning that if businesses have experienced a reduction in turnover of 100% their rent must be halved. The remaining rent is still required to be paid, however, these payments can be deferred.
4. Any reductions in statutory charges or insurance must be passed on to the tenant.
5. Landlords cannot terminate a lease based on non-payment of rent or use bond money to cover unpaid rent.
6. Landlords must not draw on tenant security for non-payment of rent, be it cash bond, bank guarantee or personal guarantee during the period of the COVID -19 pandemic. (This may be the first issue to be considered.)

Are Landlords Protected?

1. Deferred rent must be repaid over the term of the lease or within a minimum of 24 months. If only six months remain in the term of the lease the landlord must allow the tenant to make deferred payments over a 24-month period.
2. Tenants are expected to honour their obligations under a lease and are unable to walk away from a lease without financial consequences unless agreed by the parties.
3. If tenants do not abide by the substantive terms of the lease they will forfeit any protections under the code.

Binding Mediation

What if the landlord and tenant cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic)?

The Code sets out that, the matter should be referred by either party to applicable state dispute resolution processes for binding mediation^.

Early criticisms we are hearing

There is a big assumption that all landlords are wealthy and that's not always the case. The Code as legislated in Western Australia should give special consideration to small property companies and entities like SMSFs who rely on rental income in retirement. Major national commercial tenants are able to leverage their positions with landlords but smaller landlords may not be able to.

(*GOOD FAITH REFERS TO BOTH PARTIES WORKING TOWARDS THE SAME RESULT.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.