On 7 April 2020, the Australian Government released details of the Mandatory Code of Conduct (Code) to govern rent relief for commercial, retail and industrial leases of small and medium enterprises during this COVID-19 crisis.
A copy of the Code can be found here.
So, what does this mean for your business or for your leased assets?
Importantly, the Code is only mandatory for qualifying tenants – being a tenant that qualifies for the Commonwealth's JobKeeper programme (which passed into law on 8 April 2020) and has an annual turnover up to $50 million. Treasury has issued an informative fact sheet relating to JobKeeper criteria that can be found here.
But what if the tenant does not qualify for some reason? Certainly it remains open (and we suspect it is the Government's preference) for parties to a non-qualifying tenancy to use the Code as a framework for rent relief negotiations.
The Code will be implemented by each State/Territory through amendments to their respective leasing legislation / regulations and we will report further once those amendments are enacted. In the meantime, below are a number of potential scenarios and how we suggest rent relief discussions should be dealt with.
Small Business Tenants
While the Code is there to protect small and medium enterprises, it is highly likely that many small businesses would not qualify as any decrease up to 30% is likely to be a fatal blow. In other words, it is unlikely that many small businesses are operating on 30% profitability models. For example, an independent butcher shop might be forced into an insolvent trading situation where revenue drops by 20%, however their landlord will not be legally obligated to give rent relief under the Code.
Hopefully in such a situation common sense prevails and the landlord, faced with the prospect of losing a tenant forever, would provide rent relief in good faith.
Financial Stress Test
How should a tenant's financial stress or hardship be measured? The Code does provide a definition for this but then goes on to state that tenants that are eligible for JobKeeper are automatically considered to be in financial distress under the Code. Given JobKeeper eligibility is a precondition for application of the mandatory Code, the definition is somewhat redundant.
Does the client need to demonstrate the decrease to comparable trading months; to the previous month or to projected turnover? No details are provided in the Code so each situation needs to be assessed independently.
What about tenants with a national turnover in excess of $50 million but whose businesses are faced with similar financial distress due to COVID-19? Again, while the Code is not mandatory, we suggest that negotiations between landlord and tenant be conducted in line with the Code – obviously though, the Landlord will not be forced to provide rent relief in that situation. Whether there is a moral obligation to do so is another question.
Again, unpacking this suggests the Government expects that all landlords and tenants should be negotiating in line with the Code – despite it not being binding.
These are difficult times for everyone, and each situation needs to be considered individually.
If you require further information or advice, please contact Richard Abbott, Richard Skopal or a member of our Real Estate team.