Mandatory Code to Assist Commercial Landlords and Tenants

Mandatory Code to Assist Commercial Landlords and Tenants

Prime Minister, Scott Morrison has announced, on behalf of the National Cabinet, a set of proposed laws that will soon be legislated by a mandatory code to assist commercial landlords and tenants who are currently experiencing financial difficulties due to the impacts of COVID-19.

These laws will need to be legislated by the states in order give effect to the code.

Under the scheme, landlords will be forced to accept rental reductions and waivers proportional to a tenant’s loss in revenue. It will also freeze most rent increases and prohibit penalties for tenants that close. Landlords will also be banned from passing on land tax and prevent them from charging interest on unpaid rent as well as terminating leases and drawing on tenant’s securities. However tenants must honour their leases.

The new code is designed to enable good faith negotiations between landlords and businesses. With Morrison also announcing that each state will provide a binding mediation process for landlords and tenants that are unable to come to a decision or resolution in relation to the new framework.

Eligibility

The code will only be mandatory for tenants with less than $50 million in annual revenue that are eligible for the JobKeeper program.

READ MORE: What is the JobKeeper Program and am I eligible?

Key Points

  • The mandatory code of conduct outlines a set of good faith leasing principles for commercial tenancies including retail, office and industrial between owners, operators, other landlords and tenants.
  • Rent reductions will be based on the tenant’s decline in turnover to ensure that the burden is shared between landlords and tenants.
  • The policy will include a mutual obligation requirement on the small and medium sized businesses and not-for-profit tenants to continue to engage their employees through the JobKeeper Payment where eligible, and if applicable, provide rent relief to their subtenants.
  • Australian and foreign banks, along with other financial institutions operating in Australia, are expected to support landlords and tenants with appropriate flexibility as they work to implement the mandatory Code.
  • The Government is also waiving rents for all its small and medium enterprises and not-for-profit tenants within its owned and leased property across Australia.
  • The code and its principles will be implemented and regulated by the relevant state or territory.

Landlord and Tenant Requirements

  • landlords must not terminate leases for non-payment of rent during the COVID-19 pandemic (or reasonable recovery period)
  • tenants must stay committed to their lease terms (subject to amendments)
  • landlords must offer reductions in rent (as waivers or deferrals) based on the tenant’s reduction in trade during COVID-19
  • benefits that owners get for their properties (e.g. reduced charges, land tax, deferred loan payments) should be passed on to the tenant (in the appropriate proportion)

Case Study Example

ABC Business has a monthly rent bill of $20,000.00. Business has been reduced by 40% as a result of COVID-19. ABC Business are therefore eligible for a 40% reduction in their rent, bringing their rent bill to $12,000.00.

Of the $8,000.00 reduction received, at least 50% ($4,000.00) of that is waived and does not need to be repaid to the landlord, the remaining $4,000.00 is then deferred to be repaid over at least 24 months, or the remaining term of the lease (whichever is greater). The repayment of the deferred rent, does not commence until the end of the pandemic.

Whilst the details of the code for each state are yet to be finalised, questions around the impact of this new framework still remain as it will need to be workable for both the landlords and the tenants. To determine eligibility of this new code as a tenant, you must review your financials to ascertain any loss of revenue suffered in your business as a result of COVID-19. To assist you with this, feel free to contact us and book a time to speak with one of our experienced 8 Collective advisors.

Source: attwoodmarshall.com.au & business.gov.au

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