State & Territory updates

Mandatory Code of Conduct 

 

Mandatory Code of Conduct commercial rent relief - State & Territory updates

After the National Cabinet released a Mandatory Code of Conduct (the Code) for commercial leases, the State and Territory Governments are announcing their implementation and legislation of the Code.

2020-04-17

Updated May 2020

National Cabinet Code of Conduct overview

The Code of Conduct is mandatory for a commercial tenant who has an annual turnover of up to $50 million and is eligible for the Commonwealth Government’s JobKeeper programme, which means their turnover must have fallen by 30% or more. The Code of Conduct is currently being legislated by each state government separately.

The state legislation and regulations will give legal effect to the leasing principles within the National Code of Conduct. Landlords and tenants should ensure they comply with the Regulations and the leasing principles within the National Code of Conduct.

For tenants that do not have an impacted lease for the purposes of the relevant state legislation or Regulations, the National Cabinet Code of Conduct does state that “the principles of this Code should nevertheless apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses”.

ShineWing Australia can assist landlords and tenants with:

  1. Determining whether the Code of Conduct legislated by each State applies to a particular tenant (note that each State’s criteria is slightly different but broadly the tenant’s turnover should be less than $50 million and the tenant should be eligible for the JobKeeper payment); and

  2. Assessment of reduction in tenants’ turnover and a proportionate reduction in rent; and

  3. Turnover audit or review assurance services

Our summary of the Code is available here.

Click below to select a State or Territories update:

Australia Capital Territory

The Australia Capital Territory Government is yet to announce further information on the Mandatory Code of Conduct or legislation on rent relief for commercial property.

This will be updated as soon as announcements are made.

Back to top

New South Wales

The New South Wales Governor released Retail and Other Commercial Leases (COVID-19) Regulation 2020 (referred to hereafter as the “Regulations”) on 24 April, which gives legal effect to the principles of the National Cabinet Code of Conduct.

The Regulations, as their title suggests, apply to both retail and other commercial leases. The prescribed period of application starts on 24 April 2020 and ends on 24 October 2020.

Eligibility

For the purposes of the Regulations, an “impacted lessee” is one who qualifies for the JobKeeper scheme and for the 2018-19 financial year, the following turnover (whichever is applicable) was less than $50 million:

  • If the lessee is a franchisee – the business conducted at the premises or land concerned

  • If the lessee is a corporation that is a member of a group – the turnover of the Group. Corporations constitute a group if they are related bodies corporate within the meaning of Corporations Act 2001

  • In any other case – the turnover of the business conducted by the lessee.

Turnover specifically includes that derived from internet sales. Turnover is not otherwise defined in the regulations. However the Retail Leases Act 1994 describes turnover for the purposes of Turnover Rent calculations. That description includes “gross takings, gross receipts, gross income and similar concepts” and excludes 13 other specific items, for example GST collected and delivery charges are excluded for this purpose.

Rent relief

Landlords must:

  • Relate to up to 100% of the rent payable

  • Provide that at least 50% of the rent relief must be a waiver unless otherwise agreed.

Any rent reduction will need to be proportionate to the tenant’s reduction in turnover. The actual impact on the tenant’s turnover will not be known until the end of the six month prescribed period. Accordingly a forecast of an eligible tenant’s turnover may be appropriate initially, with a subsequent period end review of the actual impact and over/under adjustment to the calculated rent relief.

Rent deferrals and lease extensions

Rent deferrals must not be requested until the earlier of the COVID-19 pandemic ending or the expiry of the lease term. Any deferred rent must be amortised over the balance of the lease term, or 24 months, whichever is the greater.

Renegotiation of rent and other terms

Where a tenant is an impacted lessee, either party can request to renegotiate the rent payable and other terms of the lease. If a request is made, both parties must renegotiate in good faith.

The parties must have regard to the economic impacts of the COVID-19 pandemic and the leasing principles set out in the National Cabinet Code of Conduct. This includes leasing principle No. 3 which requires a landlord to offer rent reductions proportionate to the tenant’s reduction in turnover.

Prohibitions

A landlord cannot undertake any of the following prescribed actions if an impacted lessee fails to pay rent, fails to pay outgoings, or fails to conduct business:

  1. Evict the lessee

  2. Exercise a right of re-entry

  3. Recover the premises or land

  4. Seize goods

  5. Forfeit

  6. Seek damages

  7. Impose interest or fees

  8. Recover part of a security bond

  9. Make a claim on a guarantee

  10. Take possession

  11. Terminate the lease, or

  12. Any other remedy otherwise available to the landlord.

Additionally, with respect to an impacted lessee:

  1. The landlord must not increase the rent, other than rent determined by reference to turnover

  2. The landlord must not undertake any of the prescribed actions listed above after the prescribed period ending on 24 October with respect to failure to pay an amount equivalent to a rent increase amount

  3. Where a tenant is ordinarily required to pay a fixed amount towards land tax, statutory charges or insurance, any reduction in these costs received by the landlord must be passed on to the tenant, and

  4. Actions of omissions of the tenant to comply with commonwealth or state law will not be a breach of lease nor grounds for termination.

Despite the above the parties can mutually agree for an action to be undertaken including termination of the lease. Similarly the landlord can undertake a prescribed action for reasons not related to the economic impacts of the COVID-19 pandemic.

Where to next

The Regulations give legal effect to the leasing principles within the National Code of Conduct in NSW. Landlords and tenants in NSW should ensure they comply with the Regulations and the leasing principles within the National Code of Conduct.

For tenants that do not have an impacted lease for the purposes of the Regulations, the National Cabinet Code of Conduct does state that “the principles of this Code should nevertheless apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses”.

Back to top

Northern Territory

The Northern Territory Government is yet to announce further information on the Mandatory Code of Conduct or legislation on rent relief for commercial property.

This will be updated as soon as announcements are made.

Back to top

Queensland

The Queensland government introduced new legislation on 22 April.  When passed the legislation would allow for regulations to be implemented, with measures to protect landlords and tenants of commercial and residential properties.

Retail leases and other prescribed leases – legislation introduced to allow regulations for relief measures that may include the following:

  • Prohibition of eviction or lease termination

  • Regulate or prevent the exercise or enforcement of other landlord rights under the relevant lease or agreement

  • Exempt a tenant from the operation of a provision of Retail Leases Act 1994 (or another Act), relevant lease or other agreement relating to the leasing of the premises

  • Require the parties to adhere to a code or prescribed standard

  • Require a mediator or court to have regard to a code or prescribed standard

  • Provide a dispute resolution process.

The proposed measures announced and listed on the government website to date include the following:

  • Both parties will negotiate in good faith;

  • The landlord will not evict the tenant if they are in financial distress and unable to meet their commitments due to the impact of COVID-19;

  • The landlord will not increase rent, except where rent is linked to turnover;

  • The landlord will not penalise a tenant who stops trading or reduces opening hours;

  • The landlord will not charge interest on unpaid or deferred rent; and

  • The landlord will not make a claim on a bank guarantee or security deposit for non-payment of rent.

  • The above principles must be complied with for the landlord to be eligible for any land tax relief. Refer to our dedicated page on the State and Territory Governments tax relief for landlords for more information

  • In addition to the above principles the Queensland Government will develop systems and implementation of the National Cabinet Code of Conduct in Queensland.

Other government announcements

  • The initial announcements listed above are currently being worked through with relevant stakeholders as there has been significant concern on the potential impact for landlords.

  • A Small Business Commissioner will be appointed to give small businesses a single point of contact for leasing disputes and will also assist in Queensland’s implementation of the National Cabinet Mandatory Code of Conduct.

Back to top

South Australia

The South Australian parliament has passed legislation aimed at helping landlords and tenants who have been affected by the COVID-19 pandemic.

For commercial tenancies, the new measures aim to:

  • Provide a six month moratorium on evictions due to unpaid rent or outgoings arising from financial hardship* as a result of COVID-19;

  • Provide a temporary freeze on rent increases where the lessee is suffering financial hardship*, unless otherwise agreed between the parties;

  • Provide that a landlord must not require payment of land tax by a tenant who is suffering financial hardship* as a result of COVID-19;

  • Ensure that an act or omission of a lessee required under law in response to COVID-19 will not be a breach of a commercial lease and would not constitute grounds for termination.

  • Provide landlords and tenants the ability to apply for mediation or a determination in the event of a dispute;

  • Ensure that in making any determination, the Commissioner has regard for the tenant’s proportionate reduction in turnover during a specified period as compared with another specified period determined by the Commissioner as being relevant to the circumstances;

*A tenant will be taken to have suffered financial hardship as a result of COVID-19 where they are eligible for or are receiving a JobKeeper payment in respect of the business of the tenant.

The legislation also provides the Governor with the power to make regulations, including for the purposes of mitigation of adverse impacts on a party to a lease resulting from the COVID-19 pandemic.

Additionally small businesses suffering from a significant downturn in trade as a result of COVID-19 are able to apply for a one-off $10,000 grant.

Land tax relief is also provided to eligible landlords, details of which can be found here.

The government is also monitoring legislative changes in other states who have begun implementing other aspects of the National Cabinet Code of Conduct  and may introduce further changes shortly.

Back to top

Tasmania

The Tasmanian Government is yet to announce further information on the Mandatory Code of Conduct or legislation on rent relief for commercial property.

This will be updated as soon as announcements are made.

Back to top

Victoria

The legislation introduced in Victoria on 23 April 2020 paved the way for regulations to be subsequently implemented. The COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 were released on 1 May (hereafter referred to as the “Regulations”).  The Regulations can be found here.

The Regulations were developed and implemented subsequent to the National Cabinet Code of Conduct (hereafter referred to as the “National Code”), and apply for the period from 29 March 2020 to 29 September 2020.

Eligibility

The Regulations apply where a tenant is an “SME” entity and is participating in the JobKeeper scheme.

An SME entity is one who, together with its prescribed group members, has an annual turnover of less than $50 million either in the current financial year or the previous financial year.

A tenant’s prescribed group for the purpose determining whether it is an SME entity includes:

1. Entities that the tenant is ‘connected with’ in accordance with the income tax legislation. That includes any entity:

  • That controls the tenant

  • That is controlled by the tenant

  • Where the entity and the tenant are controlled by the same third party.

The control test requires detailed analysis, however in general control of an entity generally exists where there is a right to more than 40% of the income or capital of the entity, or the party can exercise more than 40% of the voting power of a company.

2. Entities that are affiliates of the tenant. That may include entities:

  • That act in accordance with the wishes of or in concert with the tenant

  • That can determine how the tenant acts.

Rent relief

Consistent with the National Code, the Victorian Regulations require that Landlords and affected Tenants must work cooperatively to determine appropriate rent relief.  The prescribed process for negotiating rent relief is as follows:

Step one

Eligible tenants must apply for rent relief in writing by providing the following:

  1. A statement from the tenant that the lease is an eligible lease per the Regulations

  2. Evidence that the tenant is an SME entity

  3. Evidence that the tenant qualifies for and participates in the JobKeeper scheme.

Step two

Landlords in receipt of a written application must offer rent relief to the tenant within 14 days unless otherwise agreed. The landlord’s offer for rent relief must be based on all circumstances of the lease and:

  1. Relate to up to 100% of the rent payable

  2. Provide that at least 50% of the rent relief must be a waiver unless otherwise agreed

  3. Must take into account:

      • the reduction in a tenant’s turnover associated with the premises

      • any waiver of outgoings due to the tenant being unable to operate from the premises

      • whether a tenant’s ability to fulfil the ongoing lease obligations may be compromised without sufficient relief

      • the landlord’s financial ability to offer relief including relief provided by lenders to the landlord

      • any reduction in outgoings charged, imposed or levied to the landlord in relation to the premises.

It is clear that whilst eligibility for relief under the mandatory code of conduct is linked to the JobKeeper Payment the amount of relief is not based upon GST Turnover (as is the case for the eligibility for JobKeeper payments) but is linked to the tenant’s turnover associated with the premises. 

In addition, a reduction in turnover may not be associated with the premises where it is interest, royalties, dividends, government subsidies and online sales (in the case of a retail store).

In determining the level of rent relief, a multi factor approach is required to take into consideration all the factors, not just ‘a reduction in the tenant’s turnover associated with the premises’. For example, whilst online sales are not taken into consideration for the purposes of determining ‘a tenant’s turnover associated with the premises’, online sales should be taken into consideration for the purpose of determining ‘whether a tenant’s ability to fulfil the ongoing lease obligations may be compromised without sufficient relief’.

Step three

After a landlord has made an offer of rent relief, the parties must negotiate in good faith to agree rent relief.  A mediation process is available in the event the parties cannot agree.

Step four

Document the above by way of a variation to the lease or by any other Agreement.

Step five

If a tenant’s financial circumstances change significantly after agreeing to a lease variation, the tenant may request further relief, in which case the process of negotiation should recommence. The landlord’s offer of rent relief as a result of this subsequent request does not need to include the 50% waiver noted above.

Outgoings

Where affected tenants are unable to operate their business at the premises, the landlord must consider waiving recovery of any outgoings.  If outgoings are waived, the landlord may reasonably reduce provision of services.

Where a landlord receives a reduction in outgoings charged, such as land tax or council rates, the reduction must be passed on to the affected tenant. If a tenant has already paid the landlord more than their proportionate share, this should be reimbursed as soon as possible.

Rent deferrals and lease extensions

Payment of deferred rent must not be requested until the earlier of 29 September and the expiry of the lease term.

Repayment must be amortised over the greater of the remainder of the lease term and a period of no less than 24 months, unless otherwise agreed in writing.

Where payment of rent is deferred under an agreed lease variation, the landlord must offer an extension to the lease term equivalent to the period for which rent is deferred unless otherwise agreed between the parties.

Prohibitions

Where a tenant complies with the Regulations, their landlord cannot do any of the following for failure to pay normal rent:

  1. Evict

  2. Re-enter of recover the premises under the eligible lease

  3. Have recourse to any security relating to non-payment of rent under an eligible lease.

A landlord must not increase rent for an eligible lease during the period of application, unless the landlord and tenant agree that the regulation does not apply to the eligible lease. Rent increase may still apply to retail leases to the extent that it provides for rent to be determined by reference to volume of trade of a tenant’s business.

No fees, interest or charges can be applied to an eligible lease.

Variations in trading hours will not be a breach of lease during the period in which the Regulations apply.

Dispute resolution

The Small Business Commission will receive requests for dispute mediation in writing. We understand the mediation service will be free and parties may have legal representation.

Click here to view the Victorian Small Business Commission FAQs on the Commercial Tenancy relief scheme.

Other government announcements

If a landlord provides tenants impacted by COVID-19 with rent relief, they will be eligible for a 25 per cent discount on their land tax, while any remaining land tax can be deferred until March 2021. Refer to our dedicated page on the State and Territory Governments tax relief for landlords for more information.

Back to top

Western Australia

The WA parliament passed new legislation on 21 April to support tenants and landlords of both commercial and residential properties.

The proposed Commercial Tenancies (COVID-19 Response) Bill 2020 introduced:

  • a six month moratorium on evictions due to non-payment of rent

  • a freeze on rent increases

  • restrictions on penalties for tenants who do not trade or reduced their trading hours

  • prohibitions on charging interest on rent arrears

  • the introduction of a dispute resolution process

  • a code of conduct will be developed based on the National Cabinet Code of Conduct.

Back to top

 

How ShineWing Australia can help

If you are a landlord or tenant, please contact us for a complementary initial discussion to discuss your options and requirements with respect to determining rental relief under the Code of Conduct. Our financing specialists are also available to assist in requesting relief from your lenders.

Additionally, we can assist both landlords and tenants with determining eligibility for a range of Federal and State government economic recovery programmes. For more information on these packages, visit our dedicated COVID-19 webpage.

 

Click here to view our latest COVID 19 news and updates

Contacts

Daren McDonald

E dmcdonald@shinewing.com.au

Stephen O'Flynn

E soflynn@shinewing.com.au

Blake Rodgers

brodgers@shinewing.com.au

Abirami Chellapen

E achellapen@shinewing.com.au