The Morrison government has finalised its long awaited rent relief package for commercial tenants, outlining a plan that will force landlords to grant rent reductions to small businesses under a mandatory code of conduct.
On Tuesday afternoon, Prime Minister Scott Morrison confirmed the code will be legislated by state and territory governments, reaffirming his desire for tenants and landlords to negotiate among themselves to achieve mutually beneficial outcomes.
The mandatory code, which is the product of several weeks of negotiation between industry players and government officials at the federal and state levels, sets out the rules under which small businesses are expected to undertake these “good faith” negotiations.
“The code is designed to support those small and medium-sized enterprises, be they a tenant or indeed a landlord,” Morrison said.
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“The code brings together a set of good-faith leasing principles. Landlords must not terminate the lease or draw on a tenant’s security. Likewise, tenants must honour the lease.”
However, only businesses with less than $50 million in annual turnover that are eligible for the JobKeeper wage subsidy scheme are protected by the new code.
Here’s what we know.
Will my landlord reduce my rent bill?
The mandatory code of conduct signed off by National Cabinet includes a provision that will force commercial landlords to accept rent reductions in proportion to a tenant’s decline in turnover due to the COVID-19 pandemic.
This will be achieved through a combination of rent waivers and deferrals, and only apply to SMEs eligible for the JobKeeper scheme.
Tenants are being encouraged to share turnover information with landlords to enable negotiations about how big rent reductions should be, although the federal government has been clear this measure does not remove a tenant’s obligation to honour the terms of their lease.
Landlords are required to offer tenants at least 50% of their rent relief as waivers “over the course of the pandemic period” and the remainder in deferrals.
Deferrals are required to be covered over the balance of a tenant’s individual lease term, meaning for example, tenants with three years left on their lease will be able to gradually pay deferred rent over the course of their agreement.
Those with less time on their leases, for example six months, will have two years after the pandemic period is over to pay deferred rent.
The bottom line: Landlords cannot refuse requests for rent relief to SME tenants that are eligible for the JobKeeper scheme. Waivers and deferrals will be negotiated individually, but must follow the terms of the mandatory code.
How do I know if I’m eligible to negotiate under the code?
Here’s the tricky bit. Only small and medium businesses with $50 million in annual turnover or less, which are eligible for the JobKeeper wage subsidy scheme, can negotiate under the protections in this new code.
Everyone else is expected to pay their rent as normal, and won’t be able to negotiate with landlords under the terms described above.
However, while legislation for the JobKeeper scheme is due to pass Parliament on Wednesday (April 8), it could be weeks before businesses know whether they are eligible.
The strict eligibility criteria for the JobKeeper scheme involves showing your turnover has declined at least 30% on a comparable period a year ago, of at least a month.
But there is some wiggle room in the form of tax office discretion. For a more detailed explanation of JobKeeper eligibility, read our explainer here.
So, even those businesses not looking to receive wage subsidies are advised to apply for the scheme, as negotiations with landlords could suffer if there’s no official word on whether your business is eligible.
The bottom line: Only businesses eligible for JobKeeper payments can negotiate under this code. Those unsure whether they are eligible for JobKeeper should apply via the Australian Taxation Office, and will likely find out within the next two-to-three weeks.
Can my landlord evict me? Even after the COVID-19 pandemic?
National Cabinet agreed to a nationwide moratorium on evictions late last month, which means small and medium business tenants cannot be evicted from their premises for a period of six months.
The mandatory code introduced this week also includes a provision that will prohibit landlords from terminating leases or padlocking stores for the non-payment of rent.
The Morrison government has been clear it expects tenants to honour the terms of their lease and pay rent where possible.
But the intention of the code is to prevent landlords from evicting tenants for non-payment of rent during the pandemic period after the moratorium expires in six months.
The bottom line: Your landlord cannot evict you for non-payment of rent during the pandemic period, and must comply with the eviction moratorium, slated to last six months.
Can my rent increase during the pandemic?
Short answer: no.
The mandatory code includes a specific provision that freezes rent increases, except in the case of turnover leases.
Commercial landlords are also prohibited from charging penalties to tenants who stop trading or reduce their opening hours over the course of the pandemic.
Landlords are also banned from passing on land tax to tenants and from charging interest on unpaid rent.
After the pandemic period ends (and there’s no concrete date for when that will be) landlords are free to resume rent increases along the terms outlined in individual lease agreements.
The bottom line: Rent increases have been frozen throughout the pandemic period, and all additional penalties are gone too.
Who is enforcing this? What if my landlord doesn’t cooperate?
State and territory governments are ultimately responsible for commercial tenancy arrangements, which is why each jurisdiction must pass their own law giving effect to the mandatory code of conduct.
Enforcement will also be left up to the states, and will be overseen through a binding mediation process. But this will be different in each jurisdiction across the country.
There are few details as yet about what mediation will look like in each state and territory, but once that information is available, we’ll let you know.
The bottom line: Binding mediation will enforce breaches of the code, but it will look different depending on where your business is based.
What are the actual provisions under the mandatory code of conduct?
The code was published by the federal government last Friday. Here are the principles:
- Where it can, rent should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome;
- There will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between landlords and tenants;
- There will be a prohibition on termination of leases for non-payment of rent (lockouts and eviction);
- There will be a freeze on rent increases (except for turnover leases);
- There will be a prohibition on penalties for tenants who stop trading or reduce opening hours;
- There will be a prohibition on landlords passing land tax to tenants (if not already legislated);
- There will be a prohibition on landlords charging interest on unpaid rent;
- There will be a prohibition on landlords making a claim to a bank guarantee or security deposit for non-payment of rent; and
- Any legislative barriers or administrative hurdles to lease extensions will be removed (so that a tenant and landlord could agree a rent waiver in return for a lease extension).