The Code
On 7 April 2020, the Federal Government announced a mandatory National Code of Conduct on commercial tenancies (the Code) to be implemented by all states and territories. The Code sets out guidelines on good faith leasing principles which apply to commercial tenancies, including retail, office and industrial. They will not apply to residential tenancies.
The Code will apply for the same period as the JobKeeper initiative, that is, until 27 September 2020.
The overarching principle seems to be that landlords must share the burden of the economic downturn with commercial tenants.
The Code will apply in circumstances where the tenant satisfies the following criteria:
- They are a small to medium business i.e. turnover less than $50 million; and
- They (or the landlord) are eligible for the Federal Government’s JobKeeper scheme.
Key features of the code:
- Landlords are to offer to reduce rent in proportion to the reduction in the tenant’s business. The rent reductions may be in the form of waivers and deferrals up to 100% of the amount ordinarily payable. Each lease must be dealt with on a case-by-case basis, considering all relevant factors regarding the tenant’s business and the current lease agreement.
- Landlords must not terminate leases nor draw on a tenant’s security.
- Landlords must pass on any reductions in outgoings e.g. rates or land taxes, to tenants.
- Tenants must honour lease agreements and remain committed to the terms of their leases.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period and a greater amount in certain scenarios. However, tenants may waive this requirement by agreement should the landlord and the tenant wish to make alternate arrangements.
- 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 greater, unless otherwise agreed by the parties.
Key Distinction from the JobKeeper Eligibility
Unlike the JobKeeper Payment which is a Federal Government initiative, the laws which deal with commercial tenancies are State-based. As such, each State has passed (or will pass)legislation in relation to the Code of Conduct to implement the changes in their jurisdiction.
Another difference is that unlike the JobKeeper, there is an ongoing reporting requirement for the commercial rent relief that requires that a tenant has ongoing financial hardship. Unlike the JobKeeper which is a once off test and then you are “in” the program, the commercial rent relief is likely to be more periodic in its application and will require an agreement to be reached between the parties as to the application.
For example, if the tenant suffered a 40% reduction in income in the month of April but then returned to more normal trading in May and subsequent months, they would still qualify for the Jobkeeper payment but will only likely be able to prove hardship for one month for rent relief. That is not to say that the parties to the lease will necessarily be unable to negotiate a longer period of assistance.
Doctors renting rooms
The Code of Conduct deals with commercial tenancy arrangements. Service arrangements generally include the provision of services in addition to leasing space and as such, our understanding is that these arrangements will fall outside this Code of Conduct.
If you are purely paying a rental for rooms, the application for the reduction of rent will be linked to your ability to access the JobKeeper subsidy. That is, if your income has decreased by 30% or more, then you may contact your Landlord and request for a reduction in a portion of rent and a deferral of the balance for the period that you have been affected.
Even if you are paying a service fee, we believe that it is still prudent to seek to negotiate a reduction in any service fee with your service provider.
Information to provide your landlord
While there is no specific listing on what is required to be provided to your landlord to prove your eligibility under the Code, we expect that landlords will want reasonable information from their tenants before accepting rent relief under the code including:
- The email from the Australian Taxation Office (ATO), acknowledging application for JobKeeper.
- A statement from an accountant, on their letterhead, setting out the reduction in the turnover and that they have verified this reduction through examination of the books and records of their client.
- Being provided with copies of the tenant’s BAS for the period in question and the corresponding period of the prior financial year.
- Cash books, sales-invoices, practice reports, etc. in other words, relevant documents to your industry.
- Ongoing monthly profit and loss statements to provide updates on the financial turnover of the business and the economic impact that the current situation has had on the business.
The above list is not exhaustive, and the information required by a landlord will be on a case- by-case basis. One of the key requirements of the legislation and guidance is that parties act openly with each other and work together to reach a resolution.
Where this can not be done, arbitration groups will be established to reach a compromise.
Summary
COVID-19 has brought a period of great uncertainty and financial hardship and more than ever it is important for landlords and tenants to work together to help keep businesses alive. In line with this, the Code was announced as a set of good faith leasing principles for application to commercial tenancies and to aid the management of cashflow for SME tenants and landlords. It is important that whether you are a landlord or a tenant, you work with the other party and pass on the necessary rent reductions, where applicable.
