The Federal Government yesterday released the much-anticipated mandatory Code of Conduct – SME commercial leasing principles during COVID-19, which provides significant assistance for commercial tenants but may prove onerous to landlords.
The Code of Conduct will be implemented via State legislation, to assist tenants who are suffering financial stress or hardship due to the COVID-19 pandemic and who are eligible businesses with an annual turnover of up to $50 million for the purpose of the Commonwealth Government’s JobKeeper program.
Partner at Garland Waddington, Brendan Bathersby, said the Code of Conduct will set the rules for negotiations between tenants and landlords, probably even where the tenants are not an eligible business under the JobKeeper program.
“The Code of Conduct is good news for tenants who have been struggling to convince their landlord that a more benevolent approach is needed when requesting rent relief,” Mr Bathersby said.
The overarching principles of the Code of Conduct include that landlords must not terminate leases due to non-payment of rent during the pandemic period, they must offer tenants proportionate reductions in rent based upon the tenant’s reduction in trade and agree to freezing rent increases.
Whilst each circumstance for landlord and tenant will be different, the Code of Conduct does explain that if a qualifying tenant had experienced a 60% loss in turnover due to the COVID-19 crisis, this should result in a guaranteed 60% cash flow relief.
“At least half of this relief would be provided as a rent waiver and the other half could be through a deferral payment of rent being recouped over at least 24 months negotiated between both parties,” Mr Bathersby said.
“This significantly impacts on landlords whose income is dependent on the rent paid by tenants, with the restriction on recovering even usual outgoings from tenants meaning landlords will be left to pay for rates, water and other utilities.”
As we enter a reduced trading Easter holiday period, landlords will be encouraged to tailor temporary arrangements with their tenants, taking into account each particular circumstance on a case-by-case basis But the Code of Conduct will set the rules for determinations of disputes between parties.
“At such a difficult time, it is important that negotiations don’t compromise the ability of the SME tenant to recover from the crisis and landlords don’t lose valuable businesses.”