Commercial Leasing Principles Explained

Posted On January 12, 2021

This article is an update on the extension to the “National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19” which now operates until the 28th March 2021 – along with an explanation of the code in a nutshell.

The article is published by Business Australia and is written by Jane Wolfe – Associate Director, Australian Business Lawyers & Advisors.

LATEST UPDATE

The operation of the National Cabinet Mandatory Code of Conduct for New South Wales has been extended to 28 March 2021 – but only for retail businesses with less than a $5 million turnover (previously $50 million). Retail businesses that have experienced a 30% (or more) decline in turnover in the December quarter 2020 compared to the December quarter in 2019 are eligible.

To recap, in April 2020, the federal government released the ‘National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19’. The purpose of the code was to create a set of good faith leasing principles for commercial tenancies (including retail, office and industrial tenancies). The code was adopted by the NSW Government in the Retail and Other Commercial Leases (COVID-19) Regulation 2020 with an expiry of 31 December 2020. 

By the New South Wales regulation, landlords and tenants were obligated to negotiate in good faith the operation of the lease during the pandemic period and in doing so, take into account the leasing principles under the code. The regulations also provided that while negotiations are underway, landlords were restrained from terminating leases.  

On 1 January 2021 the Retail and Other Commercial Leases (COVID-19) Regulation (No 3) 2020 commenced. 

When the regulations expire in New South Wales on 28 March 2021, retail tenants will no longer be protected. In negotiating amendments, it is expected tenants and landlords had come to an agreement on the operation of the lease during the pandemic period.

Landlords will no longer be required to negotiate rent relief and the restraint to terminate leases for unpaid rent will resume. This is an important consideration for your cashflow and operating costs for the second half of the financial year.  

The tenant may have rights to resist lease termination if:

  • The tenant calls for negotiation and formally mediates before the Small Business Commissioner with no agreement reached because the landlord did not act in good faith in negotiations. 
  • The regulations expire with the tenant not having paid the full rent during the pandemic period.
  • The landlord seeks to recover unpaid rent and/or terminate the lease.

Legal advice must be sought including advice on whether the landlord acted in good faith. 

THE MANDATORY CODE OF CONDUCT IN A NUTSHELL 

The code provides a framework to encourage landlords and tenants negatively affected by the COVID-19 crisis to resolve tenancy disputes using the code principles. If a resolution cannot be reached, the appropriate state or territory-based retail/commercial leasing dispute resolution processes will be followed. 

PRINCIPLES OF THE CODE

Landlords: 

  • must not terminate leases for non-payment of rent and should seek to waive other expenses or outgoings payable by a tenant during any period that the tenant is unable to trade. 
  • must offer tenants a proportionate reduction in rent of up to 100% of what is usually payable, through a waiver or deferral, on a case-by-case basis and based on the tenant’s proportionate reduction in trade as a result of the COVID-19 pandemic, plus a subsequent reasonable recovery period. 
  • must pass on to the tenant any reductions in statutory rates and charges and/or insurance(s), where applicable. 
  • must share with the tenant any benefit received due to deferred loan repayments provided by a financial institution.
  • must not draw on a tenant’s bank guarantee or other security for non-payment of rent. 
  • must not apply any fees, interest or charges to rent waived and/or deferrals of rent. 
  • must allow tenants to reduce opening hours or cease to trade because of the COVID-19 pandemic without issuing any penalties or levies. 
  • agree to a freeze on rent increases (except for retail leases based on turnover rent). 

Tenants: 

  • must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the code. 
  • must continue to comply with all provisions of their lease, otherwise their rights to protection under the code may be forfeited. 
  • should be given an opportunity to extend their leases for a period equivalent to the period of any rent waiver or deferral.  

The code requires that any rental waiver must be for no less than 50% of the total reduction in rent. If the tenant requires more than 50%, the landlord’s financial ability to provide any such waiver must be taken into consideration, and the tenant may waive this requirement. 

Deferred rent must be payable over the balance of the lease term or for a period of no less than 24 months, whichever is the greater, unless otherwise agreed. Repayment is to commence from the end of the COVID-19 pandemic or expiry of the lease plus a reasonable subsequent recovery period. 

It is important to note this information does not represent legal advice and you should seek specific legal advice for your circumstances.