Through the tumultuous challenges that COVID19 pandemic has brought along with it – one major burden facing businesses who have faced extreme economic downturn has been the ongoing costs of commercial rental leases. On the 7th of April the prime minister Scott Morrison finally addressed this issue that has been called for by many – and introduced and explained the details of the Mandatory Commercial tenancies Code for Commercial and retail leases.
What is the intention of the Code?
Scott Morrison and the national cabinet identified the intention of the code as trying to preserve rental contracts and keep the renter and landlords stable through this ‘hibernation period’. The idea being that once the COVID19 pandemic is over, both can pick up from where they left off and continue to honour the contracted leases.
Morrison identified the core principles of the code are Good faith and Proportionality with landlords and tenants encouraged to work cooperatively to best manage rental relief during this uncertain period.
Who will legislate this code?
Although the national cabinet discussed and agreed upon this code – it will be considered, legislated and managed by each state and territory and will be subject to binding mediation.
It is anticipated that further information will be announced from the States and Territories about how this will be applied in each jurisdiction, as well as announcements of additional relief on land tax and rates – on the proviso this is passed on to the tenants.
Who does the code apply to?
- Tenants with a turnover of $50m or less
- Tenants that have experienced a 30% or more drop in revenue
- Where the tenant is participating or is applying to participate in the Job Keeper initiative
What is the Rental Relief available to renters?
The code does not set out an exact ruling on how tenants and landlords must act or provide rent relief – instead encouraging negotiation. Landlords are expected to negotiate in good faith and to share the pain.
- Rent relief should be proportionate to the reduction in turnover and should compromise waivers and deferrals
- Waivers must account for at least 50% of the reduction
- Recoupment of deferred rent will take place over the duration of the lease period or a minimum of 24 months e.g. if a tenant has 6 moths remaining on their lease – they should be given a 24-month period to pay back any deferred rent.
- Termination of lease cannot be on the basis of non-payment and landlords cannot dip into the bond to cover unpaid rent.
- There is an expectation that tenants honour their obligations under a lease – i.e. they cannot just walk away from a contracted lease.
What if the business is not eligible under the code?
For those with rental contracts or agreements that fall outside of this code (e.g. turnover above $50 million or haven’t seen a 30% reduction in turnover) – they will need to negotiate with their landlords however are not protected under this Commercial tenancies code. This means that there is not a one size fits all answer to all rental or commercial lease issues as different circumstances apply meaning landlords will have to negotiate and find outcomes on a lease by lease basis as the situations could vary greatly particularly depending on if their tenant is eligible for the Job Keeper payment.
Where do the banks fit in to this mandatory code?
Scott Morrison emphasised ‘the banks will be key to making this work, and urged international banks operating in Australia to provide the same level of support as the national banks have to date’. However, it is unclear how the banks will support the code and what action they will take to support tenants and landlords. Sian Sinclair, partner and head of real estate at Grant Thorton said:
“We would like to see some real support in the form of interest waivers or suspensions during any “rent-free periods” required under the Code. There isn’t a sharing of the pain unless the banks are forgoing some income – as with all other parties involved”
