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The Mandatory Leasing Code of Conduct – 14 April 2020 – Update

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The Mandatory Leasing Code of Conduct – Update – 14 April 2020

Focus on the three key principles of the Code affecting Landlords

Code Principles:

Principle 3:- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

Principle 4:- Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.

Principle 5:- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.

Waiver and deferral – Defined

Waiver and deferral include other agreed variations such as deferral, pausing and/or hibernating the lease, or any other commercial outcome reached.

A waiver is just that, it cannot be recouped by the Landlord over the term of the lease.

A deferral can be recouped as per Principle 5 above.

Case examples

Each parties position to be taken into account and subject to negotiation and agreement in good faith.

The main principle is that tenants be given cash flow relief in proportion to their loss of turnover.

Case A

60% loss in turnover would result in a guaranteed 60% cash flow relief as follows:

  • 30% waiver of rent during the pandemic period;
  • 30% deferred rent to be repaid over the remaining 2 years of the lease term;
  • tenant pays 40% of the rent during period;
  • the landlord will not terminate the lease due to non-payment of rent or call on the bank guarantee; and
  • the fixed rent increase due will not occur.

This agreement complies with the Code as:

(i) the total cash flow relief is proportionate to the loss in turnover;
(ii) 50% of the rent relief is by rent waiver with the balance as rent deferral;
(iii) Landlord cannot terminate lease or call on security during the pandemic period;
(iv) the scheduled rent review during the pandemic period will not take place.

Summary:

Where there is a 100% reduction in revenue at least 50% relief must be provided by rent free/rent waiver and remainder rent deferral.

Where there is a 30% revenue reduction, at least 15% must be by rent free/rent waiver and remainder rent deferral.

Landlords must ensure that any repayment of deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.

Also note that the parties can still enter into an alternative commercial arrangement by agreement.

This may all change as we await the Victorian Governments announcement of laws that will be announced within the next few days to the Retail Leases Act and Commercial Leases.

CONTACT:
Robert Toth | Partner | Accredited Commercial Law and Franchise Specialist | robert@mmrb.com.au | www.marshmaher.com.au | 0412 673 757
Kristen Vassilopoulos | Lawyer | kristen@mmrb.com.au | 9604 9400

Disclaimer: This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

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