SME Lease Code of Conduct Brief
MANDATORY CODE OF CONDUCT SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19 Who does this apply to? This Code applies to all commercial tenants that are suffering financial stress or hardship as a result of the COVID-19 pandemic. Hardship is as defined by SME eligibility for the Commonwealth Government’s JobKeeper programme: meaning a business or sole trader with an annual turnover of up to $50 million and whose turnover has been reduced by 30% compared to the same trading month in 2019. IF I AM A TENANT
Tenants must remain committed to the terms of their lease and can only change what is negotiated with the landlord. Tenants who do not comply with the substantive parts of their lease will not receive protection under the code.
Where a tenant has had a reduction in income from the same month in 2019 of 30% or more, then that reduction will be applied to their rent payable under the lease. For example, a business that has a reduced income of 30% is eligible for a 30% rent decrease and so on all the way up to businesses that suffered a 100% reduction in income.
The new rent payable after a decrease is to be paid to the landlord.
The rent that is reduced or discounted must be treated in two ways: as a waiver of rent and as a deferral of rent.
Waivers must make up at least 50% of the rental reduction. It must make up more in special cases where needed to ensure the tenant can still make rent payments.
Deferrals of rent (the other 50% of the reduction or more) must be spread out over the balance of the lease term or for two year; whichever is the greater, unless otherwise agreed by the parties.
If negotiated arrangements mean there is a future repayment of money then this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable recovery period.
The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period.
IF I AM A LANDLORD
Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
Landlords must offer tenants reductions in rent payable in line with the percentage reduction in a tenant’s income and in the form of waivers and deferrals.
Must pass on to tenants any reduction in statutory charges (e.g. land tax, council rates) or insurance in proportion applicable under the lease.
A landlord should seek to share any benefit it receives due to deferral of loan payments from their bank/lender with the tenant in a proportionate manner.
Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
Landlords cannot charge fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferrals.
Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable recovery period.
Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable recovery period
Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
EXAMPLE SCENARIO Joe’s Barber Shop pays rent of $5,000 per month. The shop earned income in April 2019 of $20,000. In April 2020 it will only have income of $10,000; a 50% reduction in income because of COVD-19. Because his reduction in income is more than 30%, Joe applies for the JobKeeper program to help pay staff. Joe then speaks with his landlord. The landlord is shown that Joes’ income is 50% lower than the year before and agrees to reduce the rent by 50% to $2,500 a month. Of the $2,500 reduced the landlord will waive $1,250 (50%) – meaning it never has to be paid. The landlord then defers the other $1,250 (50%) – meaning it will remain owing to the landlord but will not generate an interest charge and will only be payable once the Covid-19 crisis is over. Once the deferred rent amounts are due for payment, Joe does not have to pay it all back at once, he has a minimum of two years to make the payments of deferred rent*. If the reduced rent agreement lasts for six months, then afterwards Joe will have:
Had $7,500 in rent waived ($1,250 x six months)
Deferred $7,500 that is now payable
The deferred amount broken down to monthly payments over two years = $312.50 per month ($7,500 / 24 months)
Joe’s rent after the crisis is over is now $5,312.50 (his original $5,000 plus the deferred rent monthly payment)
*if Joe had more than two years left on his lease then the deferred rent would be broken down into payments in accordance with the term. So, a five-year term would be 60 months, three years 36 months etc. this would reduce the monthly payment payable by Joe on top of his regular rent once the crisis is over and he is trading at normal levels again.