Over the past weeks, there has been much discussion between industry groups and the Australian Federal Government on the financial stress on commercial tenancies due to the COVID-19 pandemic.
On 7 April 2020, the Australian Prime Minister confirmed that the National Cabinet had agreed on a mandatory code of conduct relating to SME commercial leases (Code). The Code will be implemented by the states and territories, via legislation or regulation as appropriate.
The application of the Code
The Code provides a series of guidelines and applies to SME commercial, retail and industrial tenants (including franchisees):
- with turnover of $50 million or less; and
- who are an eligible business for the JobKeeper Programme introduced by the Federal Government.
The application of the Code will depend on the legislation or regulations enacted by the Australian states and territories.
What does this mean for landlords and tenants?
Under the Code, landlords and tenants are expected to act in an open, honest and transparent manner and negotiate in good faith. Taking into account the impact of the pandemic on tenants, any agreed arrangements must be proportional and appropriate and should include a reasonable recovery period, in the hope that normal trading will resume at the end of the crisis.
In essence, for the duration of the pandemic and over a subsequent reasonable recovery period, the Code provides that:
- landlords and tenants must not terminate leases due to non-payment of rent, including non-payment of outgoings, GST and other contributions;
- landlords are restricted from calling on security deposits;
- any penalty interest on late payment of rent is prohibited;
- any waiver must account for at least 50% of the reduction provided to the tenants;
- rental deferrals must be repaid over the balance of lease term and a minimum 2 year period; and
- landlords are to agree to a freeze on rent increases (except for retail leases based on turnover rent).
Financial institutions are expected to come to the party to support the Code.
Binding Mediation
If the parties cannot agreed on a leasing arrangement, the matter can be referred to the relevant state Small Business Commissioner for a binding mediation.
What should landlords and tenants do?
In anticipation of the legislation that will be introduced, landlords and tenants should:
- take into account the Code in their negotiation on leases that are impacted by the crisis;
- consider their rights and obligations under the lease, i.e. whether there is any right to rental abatement, where a force majeure clause applies or whether the law of frustration applies;
- liaise with their financiers to understand the relief available to them if required; and
- ensure that any agreed arrangements or variation to the lease are documented in writing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
