National Mandatory Leasing Code for SME’s: Explained

Has your bricks and mortar retail business been affected by COVID-19? In this post, I’ll be taking you through a comprehensive look at who qualifies for the new Federal Government Code detailing rent relief guidelines for commercial property as well as the process of obtaining rent relief.

It is important to note that this post is accurate as at 15^th April 2020. Legislation and guidelines are changing on an almost daily basis and we will try to provide further updates to this post as they become known. We also encourage you to seek your own financial and legal advice where necessary.

The National Cabinet have introduced the National Mandatory Leasing Code for SME’s (Small to Medium Enterprises) to provide regulation and guidance for landlords and tenants in the negotiation of rent relief during this unprecedented time. This code is to be legislated on a state level and we will find out more exact details around how each state will deal with this code in the coming days and weeks.

Who Qualifies?

There are two criteria you MUST meet to qualify for protection under the Code.

Firstly, you must be a SME with a turnover of less than $50 million per annum, however there are some conditions that apply to this including franchised business where each lease will be assessed individually regardless of who holds the lease.

Secondly, you must be able to demonstrate that turnover or profitability is down by greater than 30% compared to the same period last year. That period can be either a month or quarter (compared to the same period last year) and you can use projected turnover figures for the quarter ending June 2020 (compared to the June 2019 quarter).

What does it mean to qualify? Basically, you are then eligible to negotiate under the new National Mandatory Leasing Code for SME’s.

What Outcomes Can You Expect?

If your business qualifies under the new leasing code, then a minimum of 50% of your lost revenue/ turnover must be converted into rent waivers by your landlord and the other 50% must be deferred. The burden of proof is on the tenant to show lost sales due to Covid 19, this means negotiating with your landlord using auditable evidence such as audited sales or BAS statements to demonstrate your loss in sales compared to last quarter/ year. A higher percentage of rent waivered can be negotiated if the tenant cannot fulfil their future duties under the lease due to a loss in profitability.

For example, let’s say that the tenant who pays $10,000/month in rent, has seen a drop in turnover of 60% in April 2020 when comparing to the same month in 2019. Under the National Mandatory Leasing Code, the landlord must now grant a proportionate amount of waived rent equal to 50% of the reduction of turnover and the remainder of lost turnover is converted into rent repayments.

Let’s do the math:

Reduction in turnover = 60%. Base Rent = $10,000

60% x $10,000 = $6,000

Therefore $3,000 (50% of $6,000) of rent is written off and $3,000 of rent is deferred.

This means that during the pandemic period. The tenant only has to pay $4,000 a month in rent.

Rent Repayments and Landlord Obligations

There are different ways in which differed rent can be repaid:

1. After the pandemic period ends, the deferred rent can be repaid over a term of 24 months, or the unexpired term of the lease, whichever is greater. If the lease has less than 24 months remaining, the obligation of the tenant is to continue to pay the monthly deferred amount owing after the term of the lease ends, even if they vacate the premises.
2. The tenant can agree to extend their lease proportionately to the amount of rent abated during the pandemic period.

During the pandemic period, under the Code, the landlord is obligated to:

• Not escalate the rent even when a rent escalation is due.
• Pass on outgoings relief provided by the government, such as amounts they have received in land tax relief.
• Not charge any penalties or interest on unpaid rent.
• Not access bank or personal guarantees during the pandemic period and/ or a reasonable recovery period.
• Not to lock out or evict a tenant during the pandemic period.

If an agreement can’t be made between the landlord and tenant regardless of the Code, then binding mediation can be requested by either party.

Implementing the Code

While the new leasing code has been passed on a federal level it is still to be legislated at a state level. Each state can make changes to the implementation to the code as they see fit. For the moment, there are some key lease terms that need to be clarified on a state by state basis:

• From what exact period is 50 million turnover calculated from? Does it include online sales?
• What is a reasonable recovery period?
• Who will be enforcing this code?
• How will outgoings budgets be treated?

Author

This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.

With all this uncertainty in the current retail landscape, it is imperative that businesses and landlords alike stay up to date and informed about lease recovery and rent abatement so that they can negotiate and make decisions with confidence. For more up-to-date information, expertise and insight in retail leasing contact us on 1300 RETAIL (738 245) or [email protected].