On Tuesday, 7 April 2020, Prime Minister Scott Morrison announced the release of a Code of Conduct (“the Code”) agreed to by the National Cabinet with respect to tenancy arrangements that involve small-medium businesses that are affected by the COVID-19 outbreak.
The objective of the Code is to share the financial burden and cashflow impact of the COVID-19 crisis between landlords and tenants. In doing so, arrangements under the Code will support business continuity and facilitate resumption of normal trading activities within a reasonable recovery period following the end of the pandemic. As a result, the interests of both landlords and tenants are served as:
- businesses will be better able to survive the crisis and recover afterwards; and therefore
- landlords will still have tenants once the pandemic is over.
The Code seeks to achieve this by imposing a “set of good faith leasing principles” for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, thus providing a consistent national approach and timely, efficient application.
As tenancy matters fall within state-level jurisdictions, each state and territory will be implementing the Code via introduction of legislation or regulation as appropriate in their respective states/territories.
Tenants and landlords affected
The Code will apply to landlords and tenants in lease arrangements where the tenant is:
- a small-medium sized business (annual turnover up to $50 million); and
- an eligible business for the purpose of the Commonwealth Government’s JobKeeper program.
The Code will apply for the duration of the period in which Commonwealth JobKeeper program remains operational. We refer to this below as the Code Period.
Mutual obligations
The Code imposes a mutual obligation requirement on the tenants covered by it to:
- continue to engage employees through the JobKeeper initiative where eligible; and
- provide rent relief to subtenants (if any).
Overarching principles
Proportional rent reductions
The Code requires rent to be reduced in line with the tenant’s decline in turnover, thus sharing the burden between landlord and tenant.
Flexibility
In recognition of the vastly varied circumstances that businesses and landlords may find themselves in during these unprecedented times, the Code does not impose explicit mandatory arrangements, but rather allows tenants and landlords to agree to “tailored, bespoke and appropriate” temporary arrangements.
Transparency
Landlords and tenants are required to 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 the Code”.
Support from banks
It was highlighted that the National Cabinet’s expectation is that Australian and foreign banks and financial institutions support landlords and tenants with appropriate flexibility to enable them to implement the Code.
Specific principles
Adhering to terms of the lease
- Landlords must not terminate leases due to non-payment of rent during the Code Period.
- Failure by Tenants to abide by the terms of their lease (subject to amendments under the Code) will cause forfeiture of any protections provided to them under the Code.
- Landlords should freeze rent increases for the duration of the COVID-19 pandemic and a reasonable recovery time thereafter.
- Landlords must not draw on a Tenant’s security (including cash bond, bank guarantee or personal guarantee) for the non-payment of rent for the duration of the COVID-19 pandemic and a reasonable recovery time thereafter.
- Landlords may not apply any prohibitions or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
Rent reductions
- Landlords must offer proportionate reductions in rent in the form of:
- waivers (i.e. a reduction in rent that cannot be later recouped by the landlord); and
- deferrals (deferring payment, pausing/hibernating the lease or other similar outcomes).
- Rent waivers must constitute at least 50% of the total reduction in rent.
- Rent that is deferred must be amortised, unless otherwise agreed, over the greater of:
- The balance of the lease term; or
- 24 months
- Payments of deferred rent must take into account a reasonable subsequent recovery period and should not commence until the earlier of:
- The COVID-19 pandemic ending; or
- The existing lease expiring
- Tenants should be provided with an opportunity to extend their lease under existing lease terms for a period equivalent to the rent waiver and/or deferral period.
- No fees, interest or other charges should be applied with respect to rent waived or deferred.
Landlords’ and Tenants’ outgoings
- Landlords should proportionately pass on any reductions in statutory charges (e.g. land tax, council rates) and insurance.
- Landlords should seek to share any benefit received via deferral of loan payments.
- Landlords should waive recovery of expenses or outgoings payable by tenants under lease terms during the period the tenant is unable to trade (as appropriate). Landlords may reduce services accordingly.
Binding Mediation
It is hoped that tenants and landlords will reach agreements amicably and efficiently without external intervention. However, where the parties are unable to reach an agreement, the matter should be referred to applicable state or territory lease dispute resolution processes for binding mediation.
The full Media Release and Code of Conduct can be found on the Australian Government website.
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