Prime Minister Scott Morrison announced new rental waivers and deferrals for commercial tenants hit by the impact of the coronavirus crisis. The National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 followed.
The mandatory code that will apply to commercial tenancies can be summarised as follows:
- Where the tenant is eligible for the Jobkeeper program
- Where the tenant has a turnover of $50 million or less
- Landlords must not terminate the lease or draw upon a tenant’s security
- Likewise, tenants must not terminate the lease
- Landlords will be required to reduce rent in proportion to the reduction in the tenant’s turnover
- It will be implemented through a combination of waivers of rent and deferrals of rent
- Waivers of rent must account for 50% at least of the reduction in the rent (the tenant may waive this requirement)
- Deferrals must be covered over the balance of the lease term and in no less period than 12 months (the PM in his speech said 12 months, the code says 24 months)
- It will be overseen by a binding mediation process run by states and territories
An example of the application of the principle of proportionality provided by the code is as follows:
- Qualifying tenants would be provided with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis
- ie. a 60% loss in turnover would result in a guaranteed 60% cash flow relief.
- At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.
- Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties
- So if the tenant’s revenue has fallen by 100%, then at least 50% of total cash flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30%, then at least 15% of total cash flow relief is rent free/rent waiver and the remainder is rent deferral.
- Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.
- The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.
The code makes particular note of the fact that all circumstances are different, and due consideration should made of both the tenant’s and landlord’s financial circumstances during this time. Should you require assistance in this matter please let us know.
More guidance will follow in the coming days.
The Armada Group.