In an effort to help keep businesses viable during COVID-19 the Australian government introduced the National Cabinet Mandatory Code of Conduct to provide commercial rent relief to affected businesses.
The Code was designed to last while the JobKeeper program is operational. With JobKeeper ending in March 2021, what will the obligations and rights of tenants and landlords be at that time?
What is the National Cabinet Mandatory Code of Conduct?
The purpose of the Code is to promote fair business practices between landlords and tenants and provide guidance on rent relief for commercial tenants.
Tenants must be experiencing financial hardship and are eligible if they:
- Qualify for the Australian Government’s JobKeeper scheme; and
- Had a turnover of less than $50 million in FY2018-19.
The code regulates the following;
- Landlords and tenants will be expected to communicate with transparency and in good faith regarding issues pertaining to the payments owed on rentals and leases
- Landlords will not force businesses closed for failure to make rental and lease payments
- Reasonable adjustments will be made to rental/lease payments in accordance with each businesses current financial condition as it is impacted by COVID-19
- Landlords must offer tenants options of waivers and deferrals on payments
- Waivers will not require repayment
- Deferrals of rental/lease payments will be made within generous time frames so as not to hamper the tenant’s ability to keep their business running
- Landlords who receive tax breaks or any other form of relief for the purpose of protecting their property, will pass the relief on to their tenants in the form of reduced payments or any other reasonably agreed to remedy to assist the business owner in remaining open
- No additional fees or interest will be held against the tenants’ during the period of a granted waiver or deferral
- Landlords agree to freeze and not to increase rents during the period of COVID-19
The guidelines apply nationally, but it is important to review the specifics of your particular territory. Many states have introduced state-based rental relief.
When will the Code expire?
The Code states that it will apply while the Commonwealth JobKeeper program remains operational. With JobKeeper extended to 28 March 2021, seemingly the Code would expire on this date, unless amended before then.
A complicating factor, however, is that the amended Retail and Other Commercial Leases (COVID-19) Regulation, which encompasses the Code, expires prior to that date on 24 October 2020.
Providing some clarity on the issue is a recent ruling upheld in the Supreme Court ruling which found that luxury footwear retailer, Sneakerboy, had another six months before its landlord could increase rent or evict it. Now, any businesses which negotiated rental relief under the code will have that last until March 2021.
What happens after March 2021?
For now, there has been no discussion or determination as to how landlords and businesses are expected to conduct themselves subsequent to March 2021. In the event that the JobKeeper program is extended, the Code will continue. However, in the event that the JobKeeper program is no longer needed, it is possible that the contracts between landlords and tenants will slowly revert back to their original state subsequent to the onset of COVID-19.
One aspect of the relief is certain, the proportion of your rental payments which were waived, as opposed to deferred, will not require repayment. In the event that your business also received a rent deferral, the deferred amount will require repayment. 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 the greater, unless otherwise agreed by the parties. It is anticipated repayment plans will be calculated to take into account the current circumstances of the business and the expected increased growth over time.
Once the Code expires, negotiations with your landlord will no longer be regulated. If you are close to the end of your lease you will be in a stronger bargaining position. Many landlords will be open to negotiate given they will find it difficult to locate an alternative tenant should you move on. Approach your landlord in good faith and share proof of your financial situation. You may find it easier to negotiate a deferral rather than a reduction, but you should also do some research on the market as rents in your area may have dropped. Make sure any agreements made with your landlord are formalised in writing.