On 7th April 2020, the Prime Minister Scott Morrison announced a National Cabinet Mandatory Code of Conduct for Landlords and Tenants, which is intended to apply to tenancies whether retail, commercial or industrial. The Code will apply in instances where a tenant is eligible under the JobKeeper Program. Whilst the JobKeeper Program incorporates specific exceptions, it generally applies to businesses which have a reduction of turnover in excess of, or equal to, 30% when compared to a similar period in a previous year (e.g. April 2019 compared to April 2020). In order for the Code to apply, Tenants will also have to have a turnover of $50 million or less. The $50 million threshold will apply in relation to franchises at the franchisee level, and in respect of corporate groups at the group level, instead of at each individual outlet level.
Scott Morrison explained that the Mandatory Code is intended to protect small and medium businesses, whether that be Tenants or Landlords. The code imposes ‘leasing principles’ and contemplates that landlords and tenants will negotiate rental relief in an ‘open, honest and transparent manner acting in good faith’.
Under the code, Landlords and Tenants (it does not seek absolve Tenants from adhering to the code) will be bound by leasing principles including overarching principles. Some principles provide that Landlords and or Tenants will not be able to terminate the lease or draw on the tenant’s security, during the Covid-19 pandemic period and for a reasonable time thereafter – ‘the recovery period’. Landlords and Tenants will further be required to negotiate rent reductions proportionate to the trading reduction in the Tenant’s business over the course of the pandemic period, through a combination of waivers of rent, deferrals of rent and lease extensions. Waivers, being permanent abatements of rent, must account for at least 50% of the negotiated reduction in rental payments.
Any deferrals of negotiated reductions in rent must be covered over the balance of the lease period, for a minimum of 24 months. For example, if the lease only has another 6 months remaining, the tenant will have a minimum of 24 months after the pandemic period (and the subsequent reasonable recovery period) to pay the deferred rental payments by equal monthly installments. The payment of any deferred rent may take place in a period following the termination of the lease. Tenants may also seek an extension of the lease term so as to have the opportunity to trade in order to repay that amount.
In the event of a failure of the Landlord or Tenant to successfully negotiate a reduced rent, they will be subject to referral by either party to the relevant State/Territory dispute resolution process for binding mediation.
B+A has a structured economically efficient method to aid the negotiation process. We are able to provide advice and assist clients to initially resolve the dispute with a view of avoiding the binding mediation process. In the alternative, B+A can also participate in the binding mediation process if a resolution cannot be reached.
If we can assist, please contact us or ask as to how the process should be initiated and pursued.