The Australian National Cabinet announced on 7 April 2020 a Mandatory Code of Conduct for Commercial Tenancies (landlords and tenants) to apply when negotiating variations to their lease. A copy of the Code can be found here and applies where the tenant is an eligible business.
Application of the Code
The Code is intended to operate in 2 formats:
1) Mandatory application where:
- a tenant is eligible to receive assistance from the Commonwealth Government’s JobKeeper program; and
- their business has an annual turnover of up to $50 million; and
2) As guidelines for good faith negotiations between the tenant and landlord where:
- a tenant’s business does not fit within the criteria.
The turnover threshold for businesses to be eligible for the JobKeeper program is $1 billion (with some exceptions) and the turnover threshold for the Code is $50 million. Some businesses may be eligible for JobKeeper but not rent relief under the Code.
For franchises, the $50 million annual turnover threshold will be determined at franchise level, but at group level for retail corporate groups. The Code does not specify how it will apply where a franchisee is not the tenant under a lease but rather ‘licences’ the premises from the franchisor.
Tenants who are part of retail corporate groups may not automatically receive the protection of the Code even if turnover at their outlet has reduced by 30 percent or more.
The Code defines the COVID-19 pandemic period as the period during which the JobKeeper program is operational. A “reasonable subsequent recovery period” is also required for many of the Code’s principles. A “reasonable subsequent recovery period” is not defined and will be different from business to business.
In accordance with the Code, if a landlord and tenant are unable to agree, they should participate in binding mediation.
Practical Outcomes Under the Code
A reduction in rent under the Code must be proportionate to the reduction in trade a tenant has suffered as a result of the COVID-19 pandemic.
The reduction in trade must be consistent with assessments undertaken by the ATO when considering the eligibility of the tenant’s business for the JobKeeper program. The ATO has advised that a business can establish that they have faced, or are likely to face, a fall in their turnover based on a comparison between the business’ current Business Activity Statement (BAS) and the BAS for the corresponding period one year ago.
BAS can contain information that is sensitive or confidential, or the reduction in turnover for a business may be evidenced in other ways, as discussed below. We would recommend that tenants seek the advice of their accountants on how this information can be presented to a landlord in a way which maintains sensitivity and confidentiality.
Where a tenant was not in operation a year earlier, or where their turnover a year earlier was not representative of their usual or average turnover, (e.g. because there was a large interim acquisition, they were newly established or their turnover is typically highly variable) the Tax Commissioner will have discretion to consider additional information that the business can provide to establish that it has been significantly affected by the impacts of the pandemic.
The Tax Commissioner will also have discretion to set out alternative tests that would establish eligibility in specific circumstances (e.g. eligibility may be established as soon as a business has ceased or significantly curtailed its operations).
Any reduction in rent that is agreed to in accordance with the Code can be entirely by way of waived rent or can be split into two components. If it is to be split:
- at least 50% of the agreed reduction must be in the form of waived rent – i.e. the landlord agrees that this portion of the rent does not have to be paid; and
- the remainder of the agreed reduction should be in the form of deferred rent. The tenant must pay back this portion to the landlord in instalments once the COVID-19 pandemic period and “reasonable recovery period” have ended.
A café rents space from a landlord for $57,600.00 plus GST per annum. The café can evidence a 60% reduction in turnover.
Under the Code, the Landlord and the Tenant agree to reduce the rent by 60%, to $23,040 plus GST per annum. The amount that the rent is reduced by is $34,560.00.
At least 50% of the $34,560.00 ($17,280.00 plus GST) must be waived by the landlord. (More than 50% can be waived if the tenant’s capacity to fulfil their ongoing obligations under the lease would be compromised and the landlord has the financial capacity to do so.)
The remaining rent ($17,280.00 plus GST in this example) will be deferred rent, which the café will pay back to the landlord by way of agreed instalments spread over at least 24 months after the COVID-19 pandemic period and reasonable recovery period is over.
Under the Code, a landlord must pass on any reduction they receive from authorities such as the local Council or insurer. A landlord is also encouraged to waive outgoings and other payments where tenants are unable to trade at all. If a tenant was paying outgoings under the lease, a tenant will still be required to contribute their usual outgoings and other payments under the lease unless the landlord agrees to waive or reduce these payments.
The Code stresses the importance of landlords and tenants negotiating in good faith to reach an agreement that is specific to each parties’ needs and circumstances. It is unclear therefore if the Code can be contracted out of. For example, a landlord and tenant may agree to use the security amount in payment of deferred rent. It is likely that parties should be able to reach agreement which is in the best interests of both parties and we would recommend that both parties acknowledge this in a written agreement.
DBL Solicitors are available to assist landlords and tenants with negotiating and implementing any agreement that may be reached.