COVID-19 | Cth Government releases Code of Conduct for Commercial Leasing Arrangements
8 April 2020
Shanna Livingstone, Special Counsel, Melbourne
Michael Mercier, Special Counsel, Melbourne
Following on from our earlier update, the Commonwealth Government has now released the mandatory Code of Conduct (Code) which the National Cabinet have agreed should be implemented by all states and territories in an effort to address the impacts of COVID-19 on commercial tenants (including retail, office and industrial). This announcement comes after the Government’s ongoing responses to COVID-19 which have resulted in the forced closure of pubs and clubs, cinemas and entertainment venues, places of worship, food courts and dining in at cafes and restaurants among other increased social distancing measures geared at slowing the spread of COVID-19 in Australia.
The purpose of the Code is to set out good faith leasing principles for negotiations between landlords and commercial tenancies experiencing financial stress or hardship as a direct result of the COVID-19 pandemic where the tenant is a small-medium sized business (with an annual turnover of up to $50 million) and who is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme. The states and territories have agreed to implement the Code and its leasing principles by passing legislation or regulations in their respective jurisdictions effective after 3 April 2020.
What are the ‘leasing principles’?
The Code sets out the following ‘leasing principles’ for negotiating and enacting appropriate temporary arrangements:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period or reasonable subsequent recovery period.
- Tenants must remain committed to the terms of their lease, subject to any amendments to their rent negotiated under the Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to tenants under the Code.
- 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, but generally using the principle of ‘proportionality’ to reduce the rent proportionately to the reduction of a tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period. It is not clear what this means for those tenants that have elected to close, rather than being required to by government, or for the treatment of online sales conducted from the Premises during any shutdown. There is also no guidance on what can reasonably be requested of tenants to substantiate the reduction of a tenant’s trade.
- Rent waivers must constitute at least 50% of the total rent reduction granted by landlords during 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 a tenant’s capacity to fulfil their ongoing obligations under the lease. Regard must also be had to a landlord’s financial ability to provide such additional waivers. Tenants may elect to waive the 50% requirement by agreement.
- Repayment of any rent deferred 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. Interestingly, when announcing this principle, Prime Minister Scott Morrison referred to a minimum period of 12 months. We understand that this point is to be clarified.
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance must be passed on to the tenants in the appropriate proportion applicable under the terms of the lease.
- Landlords should seek to share any benefits received 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 landlords, with tenants in a proportionate manner.
- Landlords should (where appropriate) seek to waive recovery of any other expense (or outgoing payable) by tenants under their leases, during the period the tenant is not able to trade. Landlords may elect to reduce services as required in such circumstances.
- If rent is deferred, repayment by tenants should occur over an extended period in order to avoid placing an undue financial burden on tenants. 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.
- No fees, interest or other charges should be applied with respect to rent and no fees, charges nor may punitive interest be charged on rent deferred.
- Landlords must not draw on tenants’ security (be this a cash bond, bank guarantee or personal guarantee) for the non-payment of rent during the period of the COVID-19 pandemic or a reasonable subsequent recovery period.
- Tenants should be provided with an opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period. This is intended to provide tenants additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
- 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, despite any arrangements between the landlord and the tenant.
- 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.
The Code also sets out a number of ‘overarching principles’ which are geared at landlords and tenants negotiating in good faith with the common goal of preserving and returning to the status quo which existed prior to the COVID-19 pandemic.
When will the Code come into effect?
As mentioned above the Code will be implemented by each state and territory which is yet to be released. The Code will come into force in each jurisdiction on a date to be decided by each of the states and territories but not before 3 April 2020.
The Code and its principles will apply for the COVID-19 pandemic period, being the period during which the JobKeeper programme is operational, and a reasonable recovery period which is not clearly defined by the Code.
How will the Code be applied?
The Code applies to all commercial, retail, office and industrial tenants that are eligible for the Commonwealth Government’s JobKeeper programme that have an annual turnover of up to $50 million. The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).
For tenants that do not qualify for the JobKeeper programme or that have an annual turnover of more than $50 million, the Code will not be mandatory but the National Cabinet have expressed the view that the Code should apply ‘in spirit’ to negotiations with any such tenants whose business has been affected by the COVID-19 pandemic, having regard to the size and financial structure of that business. The Code does not apply to residential leases.
It is intended that landlords will agree tailored, bespoke and appropriate arrangements for each tenant to whom the Code applies on a case by case basis depending on a tenant’s particular circumstances. Where landlords and tenants cannot reach agreement on the temporary arrangements as a direct result of the COVID-19 pandemic, either the landlord or the tenant may refer the matter to the relevant state or territory dispute resolution processes for binding mediation.
Now more than ever it is critical for landlords to be aware of their rights and obligations both under their existing lease arrangements and how those are altered by the Code of Conduct and state and territory legislation as and when it is passed. A copy of the Code is available here. Landlords should familiarise themselves with the Code, and in particular the above leasing principles as they look to support tenants during the COVID-19 pandemic and the ongoing management of their property portfolio.
We will continue to provide updates on the implementation of the Code and the state and territory legislation as and when it is passed. In the meantime if you require any assistance please do not hesitate to contact our Property Team.
For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.
Shanna Livingstone, Special Counsel
Michael Mercier, Associate
This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.