COVID-19
SME Commercial Leasing Principles During COVID-19

Prime Minister Scott Morrison has published a Mandatory Code of Conduct forcing landlords to reduce commercial rents in proportion to a tenant’s loss of revenue due to the COVID-19 pandemic.

The principles set out in the code seek to ensure that the burden of decline in respect of a tenant’s turnover is shared between landlords and tenants through rent 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 by the tenant, and payment of any deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months (whichever is greater).

Any reductions received by landlords for statutory charges such as land tax, council rates and insurance must also be passed on to the tenant in the appropriate proportion.

Protection of tenant’s security, including cash bonds, bank guarantees and personal guarantees, is also afforded by the Principles of the Code, where it is stipulated that

Landlords must not draw on such security for the non-payment of rent during the pandemic and subsequent recovery period.

Example

Tenant A has experienced a 60% loss of turnover due to the COVID-19 pandemic. At a minimum, Tenant A’s loss or turnover results in a guaranteed 60% cash flow relief.

Half of this relief is provided as a rent free/rent waiver period, with the other half being applied as a deferral of rent which will be recouped over at least 24 months.

This is a general example only. The circumstances of each landlord, tenant and lease are different, and are subject to negotiation in good faith.

Eligibility

The Code applies to all SME tenants with an annual turnover of up to $50 million that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme.

The SME annual turnover limit of $50 million will be applied in respect of franchises at a franchisee level, and in respect of retail corporate groups at the group level rather than the individual retail outlet level.

Timing

The Code comes into effect in all states and territories from a date following 3 April 2020 (to be defined by each jurisdiction) and will remain in place for the period during which the Commonwealth JobKeeper programme remains operational.

Further Information

To read the full “National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19” please click here.