COMMERCIAL LEASING PRINCIPLES CODE

On 7 April 2020, the Federal Government introduced the Mandatory Code of Conduct (“the Code”) which is to apply to eligible small to medium enterprise (SME) tenants impacted by the COVID-19 pandemic. The Code is to be legislated and regulated in each state and territory.

The Queensland Government is currently preparing the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (“Regulation”) to enact the Code in Queensland. Once the Regulation is made, the Code will be mandatory and will provide for a range of rent relief measures for commercial, industrial and retail tenants who meet the eligibility criteria for the Commonwealth Government’s Job Keeper program and be a

small to medium enterprise.

This effectively means a tenant must:

(a) have an annual turnover of less than $50 million; and, (b) have a 30% or greater loss in revenue.

The REIQ has recently been working collaboratively with the Department of Justice & Attorney General to ensure key aspects of the Code are reconsidered and/or further refined to suit our unique leasing landscape and economy before being legislated in Queensland. It’s anticipated that the Regulation will be made shortly.

The Code's objective is to share in a proportionate and measured manner, the financial risk and cash flow impact during the COVID-19 period whilst seeking the balance the interests or both tenants and landlords.

Eligibility Criteria

The Code applies to all commercial tenancies (including retail, office and industrial). To be eligible for the Code protections, the tenant must be:

• an eligible business for the JobKeeper program

• have a turnover of less than $50 million;

• have a 30% or greater loss in revenue.

The Code expects that even if tenants do not meet this criteria, the Code should apply “in spirit” to all leasing arrangements for affected businesses.

Key Principle

Landlords must offer tenants proportionate reductions in rent payable in the form of:

• waivers; and

• deferrals

of up to 100% of the amount ordinarily payable based on the reduction of the tenant’s trade during the COVID-19 period and a subsequent reasonable recovery period.

The duration of the rent relief is to be consistent with the period of disruption to the business effected by the COVID-19 pandemic.

What is the minimum level of rent assistance?

Rental waiver must constitute a minimum 50% of the total reduction in rent payable. This means that 50% of the agreed reduced rental amount should be waived by the landlord. Meanwhile, the other half is to be deferred for future payment in accordance with the Code.

It is also intended that reduction in turnover should be met by cashflow relief as described in Appendix 1 of the Code.

Tenants may waive the requirement for a 50% minimum waiver by agreement.

Are outgoings and other charges payable during the term of the lease?

Landlords are expected:

• to proportionately pass on to the tenant any reduction in statutory charges e.g. land tax and rates;

• to share any benefit it receives due to a deferral of loan payments it receives with the tenant in a proportionate manner;

• waive recovery of outgoings or other expenses during the period the tenant is not able to trade. However, the Landlord may reduce services as required in such circumstances

Do tenants have to repay deferred rent?

Payment of rental deferrals by the tenant must be amortised over the balance of the lease term or for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.

Repayments should not commence until the earlier of:

• COVID-19 pandemic ending (as defined by the Australian Government) or

• the existing lease expiring, and taking into account a reasonable subsequent recovery period.

Can I charge interest on waived or deferred payments?

Lessors are not permitted to charge Interest or other charges on deferred/unpaid rent or outgoings.

Are tenants bound by the remaining terms of the Lease?

Subject to any amendments to the lease agreement negotiated under the Code, tenants must continue to adhere to the terms of the lease. The tenant will forfeit any protections provided under the Code, if it fails to materially comply with the substantive terms of the lease.

Prohibitions under the Code

• Prohibition on termination of leases for non-payment of rent;

• Freeze on rent increases;

• Prohibition on landlords from making a claim on a bank guarantees or security deposit for non-payment of rent;

• Prohibition on penalties for tenants who stop trading or reduce opening hours;

• Prohibition on charging interest on unpaid rent or outgoings

• Prohibition on levying any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

DISCLAIMER - The above information is of a general nature and is not intended to address a particular individual or entity. More up to date information may be assessed from www.REIQ.com