National Cabinet Release - Mandatory Code of Conduct for Commercial Tenancies

A mandatory commercial tenancies code of conduct ("the Code") has been released by the National Cabinet. It will be legislated and regulated in each State and Territory to guide Landlord and Tenant negotiations during the COVID-19 crisis.

The Code will attempt to apply principles of good faith and proportionality.

In addition this will be overseen through a binding mediation process. 

To be eligible tonegotiate under the Code either party must:

• Bea business that is in a position of financial distress;
• Havea turnover of $50 million or less;
• Beeligible to receive support under the JobKeeper program (meaning the businesshas experienced at least a 30 per cent drop in revenue due to Covid-19restrictions).

Under the Code Landlords must not terminate the lease or draw on a Tenant’s security. Likewise Tenants must honour the lease agreement.

With regard to rent reduction, Landlords will be required to reduce rent in proportion to the trading reduction suffered by the Tenant. This is intended to be achieved by a combination of waivers and deferrals of rent.

Waivers of rent must account for 50 per cent at least of the reduction in the rental provided to the Tenant during that period, while deferrals must be amortised over the balance of the lease term and for no less a period than 12 months.

LEASING PRINCIPLES

The Code provides the following leasing principles should be applied in any negotiations between Landlords and Tenants.  

1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
2. Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the Tenant under the Code.
3. 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, 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.
4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above 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 agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
5. Payment of rental deferrals by the Tenant 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 by the parties.
6. 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.
7. A Landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the Tenant in a proportionate manner.
8. 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.
9. If negotiated arrangements under the Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the Tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
10. No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
11. Landlords must not draw on a Tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
12. The Tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. 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.
13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the Landlord and the Tenant.
14. 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.

BINDING MEDIATION

Where Landlords and Tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/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.

CONCLUSION

It remains to be seen as to how effective the Code will be in practice. All parties including Banks will need to cooperate with one another to protect the viability of both Landlords and Tenants in there most difficult of times.

Disclaimer - Reliance on Content
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.