Mandatory Code of Conduct for commercial tenancies: what does it mean for you?.

The National Cabinet’s mandatory Code of Conduct for commercial tenancies (Code) was released on 7 April 2020. Targeted at SMEs impacted by the COVID-19 pandemic, the Code will be given effect through state and territory legislation.

All commercial landlords and tenants will need to familiarise themselves with the Code to ensure they act in accordance with the key principles.

Purpose of the Code.

The purpose of the Code is to impose a set of good faith principles applicable to office, industrial and retail tenancies. These principles should guide landlords and tenants to negotiate amendments to existing leasing arrangements with the objective of sharing the financial risk and cashflow impact during the COVID-19 period.

Who does the Code apply to?

The Code is mandatory where the tenant:

• has an annual turnover of less than $50 million; and
• is suffering financial distress and hardship. Tenants who are eligible for the JobKeeper program will automatically qualify.

The principles in the Code are also designed to apply ‘in spirit’ to all leasing arrangements affected by COVID-19, regardless of whether they meet the eligibility criteria.

Duration of the Code.

The commencement date will be determined by each state or territory in their own legislation giving effect to the Code.  Despite this, the Code is designed to apply for the same duration as the Commonwealth JobKeeper program which commenced on 30 March 2020 and will run until 27 September 2020.

What are the Code’s principles?

The Code includes overarching principles relating to negotiations, in addition to leasing principles to guide landlords and tenants. These principles are set out below.

(a) Landlords and tenants to work together

The overarching principles seek to promote flexibility and allow for temporary arrangements to be tailored to each individual tenancy. They include:

• Landlords and tenants are encouraged to work together to share the financial burden.
• Landlords and tenants are expected to negotiate in good faith and in a manner that is open and transparent.
• The arrangements agreed upon should be proportionate and appropriate.

(b) Specific lease terms

Whilst the leasing principles are to be applied on a case-by-case basis, the Code contemplates several positive and negative obligations imposed upon landlords and tenants as follows:

• Rent reductions: landlords must offer tenants proportionate reduction in rent in the form of rent waivers or rent deferrals. Rent waivers must constitute at least 50% of the total rent reduction.
• Lease obligations remain on foot: tenants must continue to comply with their lease obligations where possible.
• No termination: landlords cannot terminate leases due to non-payment of rent during the COVID-19 period or a ‘reasonable subsequent recovery period’.
• No rent increases: landlords cannot increase rent during the period (except in the case of retail turnover rent).
• No penalties: landlords must not charge fees or interest on rent or payments being deferred.
• No drawing on securities: landlords cannot draw upon bank guarantees, security deposits or personal guarantees for non-payment of rent.
• Interest: landlords cannot charge interest on any rent that is waived or deferred.
• Landlords to pass on benefits: landlord must pass on any reduction it receives on statutory charges (eg land tax, council rates).

Where a tenant and landlord cannot agree upon an arrangement, the matter will be handled by a binding mediation service coordinated by each state and territory.

We can help.

For landlords, we can help you to review and consider information provided by your tenants in negotiating and reflecting temporary arrangements under the Code. For tenants, we can assist you to compile the required information to support a proposal for rent relief that is in good faith, transparent, and a proportionate solution in accordance with the Code.

For details of all of our COVID-19 tips and updates, visit the Bespoke COVID-19 Hub.