On 7 April 2020 the Federal Government announced the introduction of the Mandatory Code of Conduct (Code) in response to the COVID-19 pandemic. The Code imposes a set of good faith leasing principles for negotiations between Landlords and Tenants which will apply to commercial tenancies (including retail, office and industrial leases), where the Tenant is an eligible business for the purposes of the Commonwealth Government’s JobKeeper stimulus package.
The Code seeks to encourage negotiations between Landlords and Tenants with the objective of sharing the financial risk and cashflow impact during the period of the COVID-19 pandemic and has been developed to enable a consistent national approach to commercial leases to alleviate the financial stress and hardship being experienced by businesses.
Who will the Code apply to?
The Code will apply to all commercial tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic and are eligible for the Commonwealth Government’s JobKeeper stimulus package.
In order to meet the criteria for the JobKeeper stimulus package a Tenant must have a loss in revenue greater than 30% and have an annual turnover of $50 million or less.
The $50 million turnover threshold will be applied to franchises at the franchisee level and in relation to retail corporate groups at the group level (rather than the individual retail outlet level).
For Leases that do not fall within the scope of the Code, Tenants and Landlords will be able to negotiate and make their own commercial arrangements in relation the lease terms and rent reductions (if any).
When will the Code come into effect?
The Code will be legislated shortly through the relevant state and territory legislation and regulations, however the exact date that the legislation will be passed through Parliament is not known yet.
Also it is currently unclear on how Tenants and Landlords will be bound by the Code of Conduct and how it will be enforced, however the enacting legislation will provide more detail around how the Code will work practically.
The Code is not intended to supersede the existing legislation but aims to complement it during the COVID-19 crisis period and will run parallel with the JobKeeper stimulus package.
Good Faith Leasing Principles under the Code of Conduct
When negotiating and enacting appropriate temporary arrangements under the Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis:
1. No termination – Landlords must not terminate Leases due to non-payment of rent during the COVID-19 pandemic period (as defined by the period during which the JobKeeper stimulus package is operational and any reasonable subsequent recovery period).
2. Compliance with Lease terms – Tenants must remain committed to the terms of their Leases subject to any amendments negotiated under the Code.
Material failure by the Tenant to abide by substantive terms of their Lease will forfeit any protections provided to the Tenant under the Code.
3. Rent reduction – Landlords must offer Tenants proportionate rent reductions based on the decline in turnover in the form of “waivers” and “deferrals” during the COVID-19 pandemic period and any subsequent recovery period.
3.1 Rental waivers must constitute at least 50% of the total reduction in rent payable.
However rental waivers should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so will compromise a Tenants capacity to comply with their ongoing obligations under the Lease. Consideration must also be given to the Landlords financial ability to provide such additional waivers.
Also Tenants may elect the waive the requirement for a 50% minimum waiver by agreement with the Landlord.
3.2 Payment of rent deferrals 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 between the parties.
No fees, interest or other charges are to be applied in relation to rent waivers or deferrals.
4. Landlords passing on reductions/benefits – Any reduction in statutory charges (e.g. Land Tax and Council Rates) and insurance fees will be passed on to the Tenant in the appropriate proportion applicable under the terms of the Lease.
Landlords should also seek to share any benefit they receive from the deferral of loan repayments provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, with the Tenant in a proportionate manner.
5. Waive recovery of expenses – Landlords should, where appropriate, seek to waive recovery of any other expense or outgoings payable by a Tenant under the Lease during the period that the Tenant is not able to trade.
6. No draw on security – Landlords must not draw on a Tenant’s security (e.g. Bank Guarantee, Security Deposit or Personal Guarantee) for non-payment of rent.
7. Rent freeze – Landlords must freeze rent increases (except for retail leases that are based on turnover rent) during the COVID-19 pandemic period and reasonable subsequent recovery period, notwithstanding any arrangements between the Landlord and the Tenant.
8. No penalties – Landlords must not apply any prohibition or apply penalties if Tenants reduce opening hours or cease trade.
9. Lease term extension – Landlords must give Tenants the opportunity to extend the Lease for an equivalent period of the rent waiver and/or deferral period.
This is intended to give the Tenant additional time to trade on the existing terms of the Lease after the COVID-19 pandemic period concludes and during the subsequent recovery period.
10. Repayment extension – If any negotiated arrangements between the Landlord and the Tenant require repayment, such repayment must occur over an extended period in order to avoid placing undue financial burden on the Tenant.
In particular, no repayment should commence until the earlier of the COVID-19 pandemic ending and the Lease expiring, taking into account reasonable subsequent recovery period.
The Commonwealth Government is also acting as a model Landlord by waiving rents for all of its small and medium enterprises and not for profit Tenants within its own property portfolio across Australia.
What if Landlords and Tenants cannot reach an agreement?
If Landlords and Tenants cannot reach an agreement on leasing arrangements under the Code, the matter can be referred to the applicable state or territory leasing dispute resolution process for a binding mediation. However, Landlords and Tenants must not use the mediation process to prolong or frustrate the facilitation outcomes under the Code.
What to do next?
Whether you are a Tenant or Landlord, you should seek specific legal advice on how the Code affects your leasing arrangements by contacting Peter Crittenden on email@example.com or by phoning 02 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.