COVID-19 NEXUS ALERT #2

Impacts of the National Cabinet SME Commercial Leasing Principles

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COVID-19 NEXUS ALERT #2

Posted by Allison Anthony | 09 April 2020 | COVID-19

Impacts of the National Cabinet SME Commercial Leasing Principles

This alert is current as at 11 April 2020 and will be updated when more information becomes available.  It is provided as general information only and not intended as legal advice.

SNAPSHOT: The Federal Government has introduced a new Code which outlines a set of Commercial Leasing Principles (to apply for the term of the JobSeeker programme) – which essentially requires good faith negotiations between certain tenants and landlords to address the disruption caused by COVID-19.  Each state and territory will make necessary changes to its legislation to provide greater clarify around the application of the Code.

On 3 April 2020, the National Cabinet agreed to a ‘Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19’ (Code) – and released the Code on 7 April 2020.

Purpose:

The Code creates a set of ‘good faith’ leasing principles for to apply to landlords and tenants of ‘commercial tenancies’ (being retail, office and industrial leases) ONLY WHERE the tenant is an eligible business (with annual turnover of up to $50M) for the Commonwealth Government’s JobKeeper programme (see Nexus Covid Alert #3) (SME Tenant).

What does the Code mean in practical terms?

The Code requires that Landlords and SME Tenants must negotiate amendments to existing lease arrangements with a view to ‘aid the management of cashflow for SME Tenants and landlords on a proportionate basis’ in light of the disruption caused by COVID-19.

For a copy of the Code click here.

There are two sets of ‘principles’ in the Code as follows:

  • Overarching Principles – there are 11 in total and include:
    • The parties negotiate in good faith
    • The parties share a common interest in working together to ensure business continuity
    • All leases are unique and therefore the amendments need to be negotiated on a case by case basis
  • Leasing Principles – there are 14 in total and include:
    • Landlords must not terminate leases due to the non-payment of rent during the COVID-19 pandemic period
    • Landlords must offer tenants proportionate reductions in rent
    • Payment of rental deferrals by the Tenant must be amortised over the balance of the lease term

When does the Code apply from and for how long?

The Code is due to come into effect for each respective state and territory when prescribed by that jurisdiction – and for as long as the Commonwealth JobKeeper programme remains operational.  Of course, arrangements agreed under the Code will more than likely have effect long beyond the expiry of the programme.

As at 11 April 2020, no state or territory had issued any regulations to apply concerning the Code.

Irrespective of when states and territories enact legislation to apply the Code, Landlords and SME Tenants should enter into discussions using the Code as a basis for negotiations as soon as possible.

What is the legal enforceability of the Code?

The Code requires Landlords and Tenants to meet with a view to negotiating and agreement ‘in good faith’ based on the particular circumstances of each lease arrangement.  It is provided for guidance – and relies on the parties using ‘good faith’ to arrive at a mutually agreed outcome.

Where the parties fail to reach agreement – the Code requires that the matter be referred to a leasing dispute resolution process for binding mediation.

Matters to consider when applying the Code:

  • Is the tenant an ‘SME Tenant’ for the purposes of the Commonwealth Government’s JobKeeper programme?
  • Consider $50M annual turnover threshold for franchises and retail corporate groups.

This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before acting in relation to any specific issues.

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