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As part of the Coronavirus measures a mandatory Code of Conduct for commercial leasing was agreed by National Cabinet on Friday April 3rd.
This Code will provide welcome relief to franchise owners who have seen a fall in turnover as a result of the Coronavirus pandemic. So, it’s a help whether your business has completely closed due to government restrictions (such as a gym) or has seen a fall in revenue of 30% or more (which might include franchised cafes).
“The purpose of the Code is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants ...”
Here’s an overview of how the Code will work.
Who does it apply to?
The National Cabinet Mandatory Code of Conduct (The Code) applies to commercial tenancies:
where the business has turnover up to $50million; and
is eligible for the JobKeeper payment
What is included in the Code?
The code includes a common set of 14 principles. These include that:
landlords must not terminate leases for non-payment of rent during the COVID-19 pandemic (or reasonable recovery period)
tenants must stay committed to their lease terms (subject to amendments)
landlords must offer reductions in rent (as waivers or deferrals) based on the tenant’s reduction in trade during COVID-19
It’s important to note that the parties are free to make alternative commercial arrangement to this formula if that is their wish. Also that negotiations are expected to be on a case by case basis taking into account the individual circumstances of the tenant.
How to calculate the Rent Reduction under the Code
So, how much rent relief will you get under these new provisions? Here are some examples to illustrate how it might work.
Note that there are 2 parts to the relief:
Cash flow relief in the form of rent waiver; and
Rent deferral - which means the balance of rent is spread out over the remainder of the lease term or at least 24 months. According to the Code, “No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.”
Example 1
Turnover has fallen 60%
Current rent is $4,800 per month
Landlord must offer to provide 60% cash flow relief (i.e $4,800 x 60% = $2,880 relief).
At least half of the relief is to be provided as rent free/ rent waiver (i.e $2,800 x 50% = $1,400).
The remainder is rent deferral, to be spread over term of lease, or at least 24 months.
The new rent is $1,920 (i.e $4,800 x 40%, the level turnover has fallen to). This is still due and payable. In other words, this is the rent to be paid during the COVID-19 pandemic.
Example 2
Turnover has fallen 95%
Current rent is $8,000 per month
The landlord must offer to provide rent relief of 95% (i.e $8,000 x 95% = $7,600) The Code of Conduct means the landlord has to deal with this shortfall in 2 parts:
First, the landlord has to waive at least 50% of the shortfall, which is $3,800 (i.e. $7,600 x 50%).
Secondly, the landlord defers 50%, which is also $3,800 and can spread that over the rest of the term of the lease, or at least 24 months.
How we can help
We have helped many of our clients negotiate their rent position during these tough times. Feel free to get in contact if you would like to discuss your situation. Email me at
peter.knight@franchiseaccountingandtax.com.au
Note: There are numerous details in the Code of Conduct, so be sure to obtain advice for your specific circumstances.
Looking for the fine print? Here’s a link to the SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19