While the coronavirus pandemic continues to unfold, the National Cabinet has been hard at work addressing complex issues in the commercial leasing industry.
Yesterday Scott Morrison revealed details of the National Cabinet’s deliberations and foreshadowed a potentially mandatory code to regulate relations between landlords and tenants. This proposed plan, which will apply only to commercial tenancies, will impose upon landlords and tenants a code of conduct which forces the parties to enter ‘good faith’ negotiations around rent relief. While regulation of commercial leasing is generally within the province of the States and Territories, details of the National Cabinet meetings indicate that most of the States and Territories will introduce any nationally agreed upon code of conduct.
WHO WILL IT APPLY TO ?
As it currently stands, the code will only be mandatory for commercial leases to tenants that have annual turnover of under $50 million and which are claiming benefits under the governments recently announced JobKeeper plan. This means that tenants will need to prove a reduction in revenue of at least 30% for the code of conduct to become mandatory.
HOW WILL IT APPLY ?
While the exact details of the code are not yet finalised, the Prime Minister emphasised that it would likely impose a ‘proportionality’ concept upon short term rent arrangements.
This proportionality approach will require landlords to provide rental relief proportional to the reduction in turnover faced by their specific tenant. Early indications are that the code will not prescribe exactly how this rental relief is provided, instead allowing parties to generate agreements that meet each of their unique requirements. In addition the code is likely to require ‘good faith’ negotiation while providing mediation systems for tenants and landlords unable to reach agreement.
The general sentiment is that landlords and tenants will be strongly encouraged to have discussions between them to work out an arrangement that will suit both on their own terms. There are many different ways to achieve agreement from rent reductions, abatements, rent waivers combined with extensions of the term of the lease. Where the parties cannot agree however, the mandatory code will otherwise prescribe the outcome that must be adhered to. It is expected that banks will also need to come to the party, to support landlords who have had to revise their leasing arrangements.
The news is not all bad for landlords with the Prime Minister emphasising that the six month moratorium on evictions announced last week was not a moratorium on rental payments and that businesses not affected by the coronavirus pandemic would need to continue to meet their rental obligations.
The National Cabinet meets again on Tuesday and it is expected that the various States and Territories will roll out legislation following this meeting. As always, Cooper Partners will be sure to keep you abreast of these changes and the impact they will have on your business.
In the meantime commercial tenants and landlords are encouraged to review the terms of their leases while having open and frank discussions with their tenants about how to proceed.
If you have any questions in relation to the contents of this newsletter, please do not hesitate to contact your Cooper Partners engagement representative.
This newsletter is current as of 04 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve. Please contact us to discuss.