On Tuesday 7 April 2020 the National Cabinet agreed that states and territories would implement a mandatory Code of Conduct (the Code) via legislation or regulation as appropriate, to implement the principles agreed on Friday 3 April 2020.
The purpose of the Code is to impose a set of good faith leasing principles to apply to commercial tenancies (including retail, office and industrial) between landlords and tenants, in circumstances where the tenant is a small-medium sized business (annual turnover of up to $50 million) and is an eligible business for the purpose of the Commonwealth Government's JobKeeper programme.
Some of the main principles of the Code include:
- Landlords must not terminate of leases – There will be a prohibition on termination of leases for non-payment of rent during the COVID-19 pandemic period and a reasonable subsequent recovery period.
- Tenants must remain committed to the terms of the lease – subject to any amendments to their rental agreement negotiated under the Code.
- Landlords must offer tenants proportionate reductions in rent payable –– Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined in "definitions," in the Code) of up to100% 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.
- Rent waivers – must constitute no less than 50% of the total reduction in rent payable on the principle referred to above and should constitute a greater proportion of the total reduction in rent payable where failure to do so would compromise the tenant's capacity to fulfil their obligation under the lease. Examples can be found in Annexure I of the Code. Regard must also be had to the Landlord's financial ability to provide such additional waivers.
- Rent deferrals – Payment of rent deferrals by the tenant must be amortised over the balance of the lease term and for a period no less than 24 months, whichever is greater.
- Deferral of Loan payments – Landlords should pass on any benefit it receives due to a deferral of loan payments in a proportionate manner.
- Reduction in statutory charges – Any reduction in charges such as land tax, council rates or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- Expenses or outgoings – Landlords should seek to waive recovery of any other expense or outgoing payable by a tenant during the period the tenant is not able to trade. Landlords may reduce services as required.
- Freeze on rent increases – Landlords agree to a freeze on rent increases (except for turnover leases) for the duration of the COVID-19 period and any subsequent recovery period.
- There will be prohibitions on:
- Fees, interest, or other charges – should not be applied with respect to rent reductions or waivers and no fees charges nor punitive interest may be charged on deferral of rent agreed with tenants.
- Penalties – 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.
- Landlords making a claim to a bank guarantee or security bond – for non-payment of rent.
- Lease extensions – The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferrals period.
- Binding Mediation – Where landlords and tenants cannot agree on leasing arrangements, the matter should be referred to retail/commercial leasing dispute resolution processes for binding mediation including the Small Business Commissioner where applicable.
The Code will come into effect through the relevant state and territory legislation or regulation as appropriate. A copy of the Code can be found on our website here.
Landlords and tenants should prepare for coming lease negotiations by checking their lease documents and calculating their respective exposures. Review of insurance policies to ascertain whether loss of rents/business interruption losses will be recoverable is also advisable.