By: Than Nguyen 07/04/2020
Prime Minister Scott Morrison announced earlier today that the National Cabinet has agreed in principle to a mandatory Code applicable to commercial tenancies. The States and Territories will now proceed to enact legislation to implement the Code. Details at this stage are sketchy but it is expected to include the following provisions:
- The Code will apply to commercial tenants with turnover less than 50 million and are eligible for the Job keeper program;
- Landlords cannot terminate the lease or draw on on security bonds or bank guarantees;
- Landlord must offer rent waivers and deferrals proportional to reduction in turnover;
- Rent waivers must account for at least a 50% of rent reduction;
- Rent deferrals would be payable over the remaining term of the lease or for a minimum period of 12 months;
- Annual rent increases will be frozen;
- Reduction in statutory outgoings such as council rates and land taxes must be passed on to the tenants in the appropriate proportions;
- Landlords cannot enforce penalties for breach of trading hours obligations;
- Landlords cannot charge interest on unpaid rent;
- Landlords are required to negotiate in good faith with the tenants. If the parties cannot reach agreement by negotiation, either party may apply for binding mediation.
For example, if a commercial tenant has been paying $4000 a month in rent suffers 50% reduction in turnover, that tenant would be entitled to request 50% rent relief equivalent to $2,000 half of which will be in the form of rent waivers ($1,000) and the other half ($1,000) in the form of rent deferrals to be repaid over the remaining period of the lease. It means that for the relevant period, that tenant must still pay rent and $2,000 per month. The deferred amount of $1,000 per month could be paid by installments over the remaining months of the lease.
But if the business has been forced to shut down and suffers 100% reduction in turnover, the tenant will be entitled to request 100% rent relief 50% of which ($2,000) would be in the form of rent waivers and the other 50% ($2,000) will be in the form of rent deferrals to be repaid by installments over the remaining months of the lease.
It would appear that the Code would have very significant impact and coverage as a significant majority of small-business commercial tenants would probably have no difficulty proving that their turnover has been reduced by more than 30% due to the coronavirus.
The concept of binding mediation is particularly novel. Traditionally, mediation is a process whereby the parties are guided to negotiate a mutually commercially acceptable outcome. It is not clear if the government intends to confer quasi-judicial powers on mediators appointed by the relevant State agency such as Small Business Commissioner in NSW and its equivalent in other States.
State governments are expected to provide land tax relief to landlords. The government also expects the banks to provide support to landlords in dealing with the Code but it is not clear if this will be made mandatory.
The purpose of the Code is as the Prime Minister put it to help small business ‘hibernate’ through this difficult period and be ready to resume operations once the restrictive measures such as social gathering and distancing requirements are removed.
The Code is effective from 3 April 2020 which was the date the National Cabinet agreed to a set of principles to guide the Code. It will remain in force as long as the Job keeper program remains operational.