How does the ‘COVID-19’ Code of Conduct for commercial leases work?

The National Cabinet has agreed on a mandatory Code of Conduct for commercial landlords and tenants that will be introduced as law by each State and Territory in response to the COVID-19 pandemic.

Does the Code of Conduct apply to my lease?

The Code applies to all commercial leases (including retail, office and industrial) where the tenant has a turnover of less than $50 million per annum and is eligible for the Commonwealth Government’s JobKeeper program.

The $50 million annual turnover threshold is applied to franchises at the franchisee level and to retail corporate groups at the group level.

How should I approach rent negotiations?

Landlords will be required to look at what arrangements are appropriate for each of their leases on a case by case basis, taking into account certain overarching principles.

These principles include:

  • Landlords and tenants must discuss issues to negotiate appropriate temporary arrangements and work towards achieving mutually satisfactory outcomes;
  • Landlords and tenants must negotiate in good faith;
  • Landlords and tenants must act in an open, honest and transparent manner and must each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with this Code;
  • Any agreed arrangements must take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability; and
  • The landlord must not seek to permanently mitigate the risk of default in negotiating temporary arrangements.

Tenants will need to be prepared to work with the landlord and provide them with sufficient information to enable the landlord to negotiate in good faith. This may include an honest disclosure of your financial position to the landlord.

I’m the landlord. Does the Code mean my tenant doesn’t need to pay rent?

The answer is that it depends on the tenant’s circumstances. If your tenant has had to shut-up shop, then they probably won’t have to pay rent for a while.

The Code contains the following principles:

  • Termination: Landlords are not permitted to terminate the lease due to non-payment of rent.
  • Rent 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 turnover. Rental waivers must constitute no less than 50% of the total reduction in rent. 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.
  • Outgoings: Any reduction in outgoings must be passed on to the tenant. Where the tenant is not able to trade, landlord should seek to waive recovery of outgoings payable by the tenant.
  • Loan repayment referrals: The landlord should seek to share with the tenant any benefit it receives from its bank due to deferral of loan payments.
  • Interest: No fees, interest or other charges should be applied to rent waived or deferred.
  • Security: 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).
  • Extension of lease term: The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period
  • Rent increases: Landlords must place a freeze on rent increases.

What if the tenant breaches the lease other than by non-payment of rent?

Tenants must remain committed to the terms of their lease. The Code is not a ‘get out of jail free’ card.

Material failure by a tenant to comply with substantive terms of the lease will forfeit any protections provided to the tenant under the Code.

How long do the temporary arrangements need to last?

The principles in the Code apply for the duration of the COVID-19 pandemic and a ‘subsequent reasonable recovery period’. The COVID-19 pandemic period is linked to the period during which the JobKeeper program operates.

What if we can’t reach agreement?

Where a landlord and tenant can’t reach agreement, either party can refer the matter to mediation.

When does the Code commence?

It is expected that each of the various State and Territory Governments will implement the Code, however at this stage it is not clear when this will occur. It is also possible that certain jurisdictions will enact other laws governing commercial lease negotiations in addition to the Code. Watch this space.

How do we actually put this into practice?

First you will need to reach an agreement. Then you need to properly document what you have agreed – so that things don’t come back to bite you in the future. This may mean a formal amendment to the lease, or something less formal in the way of a side agreement.

What to do next

Each lease needs to be individually assessed to determine:

  • First, if the Code applies; and
  • If the Code does apply, what options are available to landlords and tenants to reach an appropriate outcome.

We have an experienced team of property and dispute resolution lawyers ready to protect your position. Call us on 1300 654 590.

The information contained in this post is current at the date of publishing – 8 April 2020

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