What does the new Commercial Tenancies Mandatory Code of Conduct mean for you?

The Federal Government has announced the introduction of a new Code of Conduct (the Code) that is to regulate commercial and retail leases for the duration of the COVID-19 pandemic. The Code is mandatory and expected to be legislated by the States and Territories in the coming days.

 

The purpose of the code is two-fold:

  1. to establish a uniform set of "good faith leasing principles" to apply to commercial tenancies between landlords and eligible small-medium sized business tenants; and
  2. to provide a "proportionate and measured burden share" between the parties to the lease.
The Federal Government's message has remained consistent – landlords and tenants must work together to customise tailored solutions that are negotiated in good faith, and reflect the principle of proportionality (i.e. proportionate to the impact of the COVID-19 pandemic on the tenant and to any benefit the landlord receives due to deferral of loan payments).

Who does the Code apply to?

The Code will apply to commercial and retail leases where a commercial tenant (including retail, office and industrial tenants):
  1. has a turnover of $50 million or less;
  2. has suffered at least a 30% decrease in revenue; and
  3. is eligible to participate in the Federal Government's JobKeeper programme.
We have previously prepared a guide to the JobKeeper subsidy that you can read here.

Retail corporate groups will have their turnover assessed at the group level, as opposed to at the individual retail outlet level, while franchise businesses will have their turnover assessed at the franchisee level.

Further, despite not being legally binding in respect of leases involving tenants that exceed the turnover threshold, the Code implores parties to all leasing arrangements to apply the principles of the Code "in spirit".

How long will the Code apply for?

Though the Government has not provided a fixed end date, as they have with other stimulus measures, parties to the Code will be bound by the Code for the duration of the COVID-19 pandemic period.

This pandemic period has been defined as the period during which the Job Keeper programme is operational.

Code mandated waivers and deferrals

To ensure financial burdens are being shared between both landlords and tenants, the Code requires landlords to offer rent reductions through a combination of waivers and deferrals. The reduction in rent payable must be proportionate to the eligible tenant's reduction in trade during the pandemic period and for a reasonable recovery period thereafter.

In extreme cases, this may amount to the waiver and deferral of all rent ordinarily payable over that period.

Under the Code, rental waivers must account for at least 50% of the total reduction in the rent payable  during the pandemic period. If a tenant lacks capacity to fulfil their ongoing obligations under the lease, the Code recommends that further amounts should be waived by landlords if they have the financial ability to do so.

This requirement can be waived by the tenant though.

The Code also requires that rent deferrals be amortised over the remaining lease period or for a period of at least 24 months, whichever is greater. Again, this requirement can be waived by the mutual agreement of the parties.

Moratorium on evictions and recovery confirmed

As foreshadowed by the Federal Government's previous announcements, landlords must not terminate a lease due to the non-payment of rent during the COVID-19 pandemic or for a reasonable "recovery period" after the pandemic passes.

Additionally, if a negotiated lease still requires the repayment of rent, the Code stipulates that this repayment should take place over an extended period of time that may only commence upon the earlier of the COVID-19 pandemic ending, or the existing lease expiring.

Further, landlords cannot draw on a tenant's security for unpaid rent either, whether this be a bond, bank guarantee or personal guarantee. Landlords also cannot charge fees, interest or other charges on deferred rent and any amount of reduction provided by a waiver may not be recouped by the Landlord over the term of the lease.

Not one-sided

The obligations arising from the rental relief policy are not solely directed at landlords. Tenants must also honour and remain committed to the terms of their lease, subject to any amendments negotiated under the Code.

A tenant who fails to comply with a substantive term of their lease in a material manner will forfeit themselves from the benefits of any protections that otherwise would have been available to them under the Code.

It's time to talk

In announcing the introduction of the Code, the Federal Government's message has remained consistent with previous media statements – landlords and tenants must work together.

Though parties will largely be led by the principles set out in the Code, parties are still encouraged to negotiate "tailored, bespoke and appropriate temporary arrangements" taking into consideration each parties' particular circumstances.

The Code has also introduced a mandatory mediation process for landlords and tenants who cannot come to an agreement.

In such circumstances, the parties should refer the matter to their state's appropriate commercial leasing dispute resolution processes, for example The Office of the NSW Small Business Commissioner in NSW or Victorian Small Business Commission in Victoria, for binding mediation.

It takes a village

The Federal Government again announced its expectation that both Australian and international banks will provide sufficient support to landlords and tenants as they navigate these uncharted waters.

As we have previously discussed, a number of Australian banks have extended their business support packages as the financial impact of the COVID-19 pandemic worsens. Commercial landlords with loans of up to $10 million will be eligible for repayment relief for a period of six months, provided that they undertake not to terminate leases or evict tenants unable to pay rent as a result of COVID-19 related financial hardship.

Landlords who are granted loan repayment deferrals are required to share that benefit in a proportionate manner with their tenants under the Code.

Takeaway considerations

In announcing the Code, the Federal Government has reiterated that landlords and tenants share a common interest in working together to ensure both parties can continue to trade during the pandemic.

In light of the mandatory Code, we outline some of the important considerations for commercial landlords and tenants to keep in mind:

  1. Parties must engage in negotiations and attempt to reach a solution that is made in good faith and proportionate to the loss of a tenant's turnover.
  1. Landlords should request, and tenants should provide, sufficient and accurate information to further such negotiations and help achieve an appropriate arrangement.
  1. As recommended in our previous article regarding the moratorium on evictions, parties should ensure that they accurately document any arrangements that vary the terms of a lease.
  1. Parties must also assist each other with their respective dealings with third parties such as governments and government agencies, utility companies and financial institutions.
  1. Both tenants and landlords should consider whether they are entitled to benefit from the Federal Government's recent stimulus measures or are entitled to relief from their banks. You can read further about some of the measures being implemented to support SMEs in our articles: Key points on the new Federal Government economic stimulus package for SMEs, and An SME’s guide to the Federal Government JobKeeper subsidy.
  1. Finally, remember that the Code only applies to parties suffering financial stress or hardship as a direct result of the COVID-19 pandemic. The Code does not extend to parties whose financial hardship arises from other causes.
We will continue to keep you updated as the States and Territories legislate the Code and introduce measures to regulate residential tenancies as well.

McCabe Curwood has extensive experience in advising both tenants and landlords as to their rights and obligations. If you have any questions or concerns regarding a lease or how the Code may impact you, please do not hesitate to contact McCabe Curwood.

Contributors

Nathan Jones Special Counsel
Stephanie Andrews Lawyer