On 7 April 2020, the Australian National Cabinet comprised of all Australian State or Territory’s Premiers or Chief Ministers and the Prime Minister of Australia announced its National Code of Conduct (the Code) to assist with commercial, industrial and retail tenancies affected by the on-going COVID-19 pandemic that is causing businesses and livelihoods to suffer on an unprecedented scale.
What exactly is the Code?
The Code imposes a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between tenants and landlords which apply to negotiating amendments to existing leasing arrangements during the COVID-19 pandemic period.
The Code will be legislated and regulated in each State and Territory to guide Landlord and Tenant negotiations during the COVID-19 crisis in an attempt to apply principles of good faith and proportionality in sharing the financial risk and cash-flow impact, whilst balancing the interests of tenants and landlords during this difficult period of the country’s economic trade.
Who does the Code apply to?
The National Cabinet has stated that under the Code, the principles outlined would apply to all tenants that are suffering financial stress or hardship that:
- Is a business that is in a position of financial distress;
- Is a business that has a turnover of $50 million or less; and
- Is a business that is eligible to receive support under the JobKeeper program (i.e.: the business has suffered at least a 30% drop in its revenue because of the COVID-19 crisis).
The Code’s Principles
The Code has overarching principles which are to apply in guiding negotiations between tenants and landlords, including:
- That parties must negotiate in good faith;
- That tenants and landlords must behave honestly and transparently during negotiations;
- That tenants and landlords must work together towards achieving mutually satisfactory outcomes;
- That the parties must make arrangements which are appropriate for the particular lease and are proportionate to the impact on the tenant; and
- That in the context of negotiations, each party provide “sufficient and accurate information” during the process.
Leasing Principles of the Code
The Code sets out various leasing principles, which are to be applied on a case-by-case basis in any negotiations between tenants and landlords.
If tenants and their landlords are unable to reach a mutually acceptable agreement (as a result of the COVID-19 pandemic), then they will be subject to referral by either party to the respective applicable State and Territory dispute resolution processes for binding mediation including Small Business Commissioners/Ombudsmen where applicable.
It is vital to note that tenants and landlords alike must not use the mediation processes to frustrate or prolong the facilitation of an amicable resolution outcome during this COVID-19 crisis.
What does the Code mean for Tenants?
The main effects of the leasing principles of the Code on tenants are that:
- Tenants will NOT be evicted due to non-payment of rent during the COVID-19 pandemic period;
- Tenants will have the benefit of proportionate reductions in rent payable in the form of waivers (being rent abatement) and deferrals of rent of up to 100% of the rent payable, based on the reduction in the tenant’s trade;
- The rental waivers (rent abatement) must constitute a minimum of 50% of the total reduction in rent payable over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease (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);
- If rent is deferred, payment of the deferred rent must be amortised over the balance of the lease term or a period of no less than 24 months, whichever is greater (unless otherwise agreed). Repayment of deferred amounts cannot commence until the earlier of the end date of the COVID-19 pandemic or the existing lease expiring. Repayments should occur over an extended period to avoid placing undue pressure on tenants;
- No fees, interest or other charges may be applied in respect of rent waived, nor any fees, charges or punitive interest may be charged on deferrals;
- For retail tenants, landlords may not apply any prohibition or levy penalties if the tenant reduces opening hours or ceases to trade during the COVID-19 pandemic; and where appropriate, waiver of an expense or outgoing payable for the period the tenant is unable to trade.
It is important for tenants to note that they must ensure that at all times, they continue to comply with their substantive lease terms as a material failure to comply with the substantive terms of a lease would mean that a tenant would then forfeit any of its protections under the Code.
What does the Code mean for Landlords?
Landlords will be significantly impacted in numerous ways in light of the Code, including the following:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period. However, it is important to note that this restriction on termination of the lease relates only to non-payment of rent;
- Landlords must freeze any rent increases until the COVID-19 pandemic ends (excluding retail tenancies where rental is calculated pursuant to turnover rent);
- :andlords should seek to share any benefits received due to the deferral of loan payments provided by a financial institution as part of the Australian Banker’s Association’s COVID-19 response;
- If there is a reduction in statutory charges such as land tax and council rates, or insurance, that reduction must then be passed onto by the landlord to the tenant in the appropriate proportion;
- Landlords must not draw on tenants’ security for the non-payment of rent during the pandemic period and/ or a reasonable subsequent recovery period;
- Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant during the period the tenant is not able to trade; and
- Landlords should provide tenants with the opportunity to extend leases for an equivalent period of the rent waiver and/or deferral period to provide tenants additional time to trade during the recovery period on existing lease terms.
When will the Code commence and how long will all of this last?
The Code states that it will come into effect on a date set by the respective States or Territories after 3 April 2020 and will continue to apply for “the period during which the Commonwealth JobKeeper program remains operational”.
It is vital for tenants and landlords to be aware of their rights and obligations under their existing lease agreements and the Code in conjunction with the respective State and Territory legislations as passed.
Please do not hesitate to contact us via email at email@example.com to seek an obligation free consultation with one of our lawyers if you require any assistance regarding any legal issues you might be facing. We at AH2 Legal remain steadfast in helping you and will remain your trusted legal advisors during this period of uncertainty. Ahead, Together.