On 7 April 2020 the Prime Minister, Scott Morrison, announced that a new Mandatory Code of Conduct for Commercial Tenancies (including commercial, retail and industrial leases) would be implemented across Australia. It will be introduced in NSW by legislation and will apply where the tenant’s business has an annual turnover of up to $50m and it is eligible for the JobKeeper Payment.
The principles the Code are as follows:
- 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 negotiated under the Code. If tenants fail to abide by the terms of their lease, they will lose protections provided to them 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, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
Waiver and deferral also includes other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), or any such other commercial outcome or agreement reached between the parties. - Rental waivers must constitute no less than 50% of the total reduction in rent agreed 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 agreement. Regard must be had to the landlord’s financial ability to provide such additional waivers.
Any amount of reduction in rent provided by a waiver may not be recouped by the landlord over the term of the lease.
Tenants may waive the requirement for a 50% minimum waiver by agreement. - 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.
- Any reduction in statutory charges (eg land tax, council rates) or insurance will be passed onto the tenant in the appropriate proportion applicable under the terms of the lease.
- A landlord should seek to share any benefit it receives due to 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 negotiated arrangements under the Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. 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 waived, and no fees, charges or punitive interest may be charged on rent deferrals.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and or a reasonable subsequent recovery period.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period agreed to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic period 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, notwithstanding 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.
Binding mediation
Where landlords and tenants cannot reach agreement on amendments to the leasing arrangements in accordance with the Code, either party may refer the matter to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation. Landlords and tenants must not use the mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
Conclusion
There will be issues surrounding how tenants substantiate the reduction in their trade, how rent reductions are to be calculated and the risks involved for both landlords and tenants in proceeding to a binding mediation where the mediator can make a final decision on the dispute.
April 2020