COVID-19: Mandatory Code of Conduct for Commercial Leasing
On 7 April 2020, the National Cabinet’s Mandatory Code of Conduct (Code) for commercial leasing came into effect. The Code sets out a number of leasing principles for application to commercial leases where the tenant is suffering financial hardship as a result of COVID-19.
Who does the Code apply to?
The Code applies to all commercial leases where the tenant:
- has an annual turnover of less than $50 million; and
- is eligible for the Commonwealth Government’s JobKeeper program.
It does not apply to residential tenancies.
The express objective of the Code is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords.
The Code sets out a number of principles to guide landlords and tenants in such arrangements, including in negotiation and implementation.
The Code sets out a number of overarching principles that will apply to the arrangements between landlords and tenants. These key principles are set out below:
- Good faith and transparency
Landlords and tenants will negotiate in good faith and must act with openness, honesty, transparency and accuracy and will provide each other sufficient and accurate information to achieve outcomes consistent with the Code.
- Leases to be dealt with on a case-by-case basis
All commercial leases must be dealt with on a case-by-case basis, considering factors such as:
- whether the tenant has suffered financial hardship due to the COVID-19 pandemic;
- whether the tenant’s lease has expired or is soon to expire.
- Factors taken into consideration
Any negotiated arrangements under the Code between the landlord and tenant must take into account the following:
- the impact of the COVID-19 pandemic on the tenant, with specific regard to the tenant’s revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period;
- the lease structure, period of tenure, mechanism for determining rent, whether the lease has expired and the tenant is “holding over”; and
- whether the tenant is in administration or receivership, and the application of the Code is to be modified accordingly.
Commercial Leasing Principles
The Code sets out leasing principles that will apply in the negotiation and implementation of appropriate arrangements on a case-by-case basis:
- No Termination of Lease
Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period or reasonable subsequent recovery period.
- Leesee must comply with Lease
Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code. A material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under the Code.
- Rent Relief
- Waivers and Deferrals
Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
The rental waivers must constitute no less than 50% of the total reduction in rent payable 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.
The rental waiver amount may not be recovered by the landlord.
The parties must have regard to the landlord’s financial ability to provide such additional waivers.
Tenants may waive the requirement for a 50% minimum waiver by agreement.
- Repayment Period
Payment of rental deferrals by the tenant must be amortised over:
- the balance of the lease term; and
- a period of no less than 24 months,
whichever is the greater, unless otherwise agreed by the parties.
- Commencement of Repayment Period
In order to avoid placing an undue financial burden on the tenant, the repayments should occur over an extended period. The repayment should commence on the earlier of:
- the COVID-19 pandemic ending; or
- the existing lease expiring,
and take into account a reasonable subsequent recovery period.
- Rent Increases Frozen
Landlords must freeze rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.
- Other Expenses
- Statutory Charges
Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
- No Fees, Interest or Other Charges
No fees, interest or other charges should be applied with respect to rent waived.
No fees, charges or punitive interest may be charged on deferrals.
- Other Protections
- Benefit from Loan Payment Deferrals
A landlord should seek to share any benefit it receives due to deferral of loan payments with the tenant in a proportionate manner.
- Tenant’s Security
A landlord must not draw on a tenant’s security for the non-payment of rent (whether a security bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- Lease Extension
The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
- Trading Restrictions
Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
Where landlords and tenants cannot reach agreement on leasing arrangements, either the landlord or tenant may refer the matter to the applicable state or territory retail and commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.
Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
Johnston Withers Lawyers: Experience You Can Trust
If you are a landlord or a tenant affected by the COVID-19 pandemic, we can assist you in understanding your rights and obligations and in negotiating appropriate arrangements. Our commercial and property lawyers have extensive experience in acting for landlords and tenants in relation to all aspects of commercial and retail leases. If you need advice or direction from a lawyer, please contact Michael Stannard on (08) 8231 1110 or get in touch online.