Earlier this week several key institutional bodies issued a joint statement to advocate for a new National Leasing Code of Conduct.
Those key institutional bodies were the:
- National Retail Association;
- Australian Retailers Association;
- Pharmacy Guild of Australia; and
- Shopping Centre Council of Australia,
The joint statement proposed a leasing Code of Conduct that would effectively implement the broader principles cited by the National Cabinet and Prime Minister, Scott Morrison. Those principles relate to critical issues such as rent relief and termination rights. The leasing Code of Conduct would govern both Tenants and Landlords.
At Liberty Leasing, we are of the view that a leasing Code of Conduct will help balance the bargaining power between institutional Landlords and small-to-medium sized Tenants. However, in some places additional consideration is required to the scope out the practical application of both the initial National Cabinet principles and the additional principles proposed by the Group.
Who does the code specifically apply to?
There is an initial question of the Tenant’s that would be receive the benefit of the leasing Code of Conduct. In their joint statement, the Group referred to small-to-medium sized businesses being given a priority. Will the code apply:
- to any Tenant that is captured by the retail legislation; or
- to all retail and commercial leases; or
- a revenue threshold so that power strong holds likes The Just Group are excluded?
We expect the intention is like that the leasing Code of Conduct will apply to all Tenants with a retail or commercial lease but will be subject to a revenue cap.
Financial Distress: What is the criteria?
Tenants won’t be without their own obligations under the leasing Code of Conduct. These obligations primarily include transparent financial disclosures to evidence the Tenant’s capacity (or lack thereof) to pay. The principles set out by the National Cabinet contemplate the term ‘financial distress’. The Group didn’t propose any further scope on what ‘financial distress’ may mean. Accordingly, it would likely be left to be determined on a case by case basis. However, we wonder whether it’s a worthwhile exercise to provide a simple clarification in the code. Namely, does ‘financial distress‘ mean that your:
- business has experienced a decrease in gross sales as a result of COVID19; and
- financial position needs to be sufficiently depleted that you cannot pay the rent.
We expect that the code may require Tenants to meet both of the tests above. If the test was simply demonstrate a decrease in gross sales, then the rent abatement could be continued for an unforeseeable amount of time as the economy recovers.
We’ve seen some retailers truly innovate their business model to adapt to the current climate. Many of those adaptions are ultimately going to require financial investment. Whether there should be carve out for retailers with innovation plans or an obligation on Tenants to mitigate loss to improve their financial situation has not been discussed.
The Group has rightly said that rent relief or deferrals should prioritise small – medium businesses that have been classified as non-essential by the Australian Government. The Group will naturally have a heightened concern for smaller Tenants captured by the retail legislation. However, there will nonetheless need to be significant conversations with major Tenants, including Myer. Myer will potentially breach its debt covenants unless it receives rent relief from Landlords. It is unclear what Myer’s refinancing options will look like, with its current debt maturing in less than 12 months.
There is an incentive to keeping Myer alive. Without Myer, David Jones has a monopoly over the department store market. A monopoly would effectively rid the market of any competition. A David Jones monopoly would have a direct impact on the public, which could ring alarm bells for a Government bailout for the department store giant.
We are agreeable that a lease Code of Conduct won’t be deigned for major Tenants such as Myer. However, there needs to be simultaneous plans of action for major Tenants.
The National Cabinet proposed that Tenants should be armed with a termination right. The Group did not support this principle. Liberty Leasing agrees on this point. Such a concept would be difficult to legislate and potentially cause too great of a loss to Landlords. To a certain extent, loss needs to be equally balanced during this economic crisis. Furthermore, a Tenant termination right does not breed the collaborative environment that the National Cabinet in equally calling for.
In the reverse, the Group supports a moratorium on re-entry / termination by Landlords for non-payment of rent.
Relief for Landlords
The Group advocated that the Australian Government should reduce statutory charges payable by Landlords, inclusive of council rates and land tax. These reductions are to be passed on to Tenants, where relevant. We support the reduction of outgoings, however it’s important to note that the retail legislation in several states prevents the recovery of land tax, so this would not provide outgoings relief nationally.
You can read the joint statement from the Retail Group here.