The Prime Minister announced yesterday that the states and territories have agreed to implement a mandatory Code of Conduct that deals with commercial leasing. It would be legislated in the ACT by the use of the mechanism stated in our previous article (https://www.chamberlains.com.au/covid-19-act-commercial-and-retail-leasing-update/).
The purpose of the code is to impose good faith principles for landlords and tenants to come together and negotiate an agreement. It applies to tenants who are a small-medium sized business with annual turnover of up to $50 million, and they must be eligible for the Federal Government’s JobKeeper program.
What are the leasing principles of the code?
In negotiating temporary arrangements under the code, the following principles should be applied on a case-by-case basis:
- Landlords must not terminate leases due to non-payment of rent
- Tenants must remain committed to the terms of their lease, subject to any temporary agreements reached under the code. Material failure to abide by the substantive terms of the lease will forfeit any protections granted to the tenant under the code
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals, based on a reduction of the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period. In other words, a 40% reduction in revenue would allow for a 40% reduction in rent. No fees, charges or punitive interest may be charged by the landlord on deferrals.
- Rental waivers must constitute no less than 50% of the total reduction in rent payable for the above point. Tenants can waive this requirement by agreement in writing. The landlord’s financial ability to provide such additional waivers must also be taken into account. No fees, charges or punitive interest may be charged by the landlord on deferrals.
- 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. No fees, charges or punitive interest may be charged by the landlord on deferrals.
- Any reductions in statutory outgoings or insurance to the landlord must be passed to the tenant in the appropriate proportion under the terms of the lease
- A landlord should seek to share any benefit it receives due to a deferral of loan payments with the tenant in a proportionate manner
- 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
- If a negotiated agreement provides for the tenant to make a repayment, this should occur over an extended period and no repayment should commence until the ending of the COVID-19 pandemic or existing lease expiring
- Landlords must not draw on the tenant’s security for non-payment of rent during the COVID-19 pandemic period, or subsequent recovery period
- Landlords agree to freeze rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, unless otherwise agreed in writing between the parties
- 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
What exactly are the overarching principles of the code?
The following overarching principles (as quoted from the code) apply in guiding the negotiations:
- Landlords and tenants share a common interest in working together, to ensure business continuity, and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during a reasonable recovery period.
- Landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes.
- Landlords and tenants will negotiate in good faith.
- Landlords and tenants will act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with this Code.
- Any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period.
- The Parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of this Code.
- All premises are different, as are their commercial arrangements; it is therefore not possible to form a collective industry position. All parties recognise the intended application, legal constraints and spirit of the Competition and Consumer Act 2010.
- The Parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under this Code.
- All leases must be dealt with on a case-by-case basis, considering factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic; whether the tenant’s lease has expired or is soon to expire; and whether the tenant is in administration or receivership.
- Leases have different structures, different periods of tenure, and different mechanisms for determining rent. Leases may already be in arrears. Leases may already have expired and be in “hold-over.” These factors should also be taken into account in formulating any temporary arrangements in line with this Code.
- As the objective of this Code is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership, and the application of the Code modified accordingly.
What about landlords?
The code does not deal with landlords and the Prime Minister has called on banks to provide support.
What can Chamberlains do?
Our experienced Property Team can help landlords and tenants in understanding both their obligations and options under the new mandatory Code of Conduct.