8 April 2020

Commercial Tenancy Code of Conduct – Coronavirus Pandemic

Bill Purcell
Bill Purcell Property Lawyer

The National Cabinet which has been formed between the political leaders of the Australian states and territories has adopted a Code of Conduct which will have the force of legislation in each state and territory for the duration of the coronavirus pandemic and beyond.

This article summarises the essential features of the Code. Another article we have written provides commentary and analysis on the Code of Conduct and it can be accessed by clicking here.

Overview of the Code of Conduct

The Code imposes a set of leasing principles which must apply to retail, office, industrial and other commercial tenancies in which a tenant conducts a business which is eligible for the JobKeeper programme.

The Code will apply until, according to the Australian Government, the pandemic ends and until the end of a subsequent reasonable recovery period (“relevant periods”).

The Code applies to commercial tenancies which have an annual turnover not in excess of $50 million and which suffer financial stress or hardship as a result of the pandemic.

The Code intends to make landlords and tenants share the financial risk and cash flow impact, proportionately, during the relevant periods. Landlords are to agree a “tailored, bespoke and appropriate temporary arrangements” with tenants on a case-by-case basis.

The Code requires landlords and tenants to negotiate in good faith to ensure business continuity and to facilitate the resumption of normal trading activities during a reasonable recovery period when the pandemic ends.

Negotiations must be conducted openly, honestly and transparently and sufficient, accurate trading and financial information must be exchanged in a timely manner.

Leasing principles

Other overarching principles will apply in guiding negotiations – each of which is intended to mitigate the impact of the pandemic upon the tenant.

There are 14 leasing principles which the Code of Conduct applies to temporary arrangements negotiated between landlords and tenants –

  1. Landlords must not terminate leases for non-payment of rent up to the end of the relevant period
  2. Subject to lease variations negotiated under the Code, tenants which fail to comply with certain obligations under their leases will forfeit the protection of the Code. For example, they may be evicted.
  3. Landlords must offer tenants rent reductions. They may be in the form of deferrals, discounts, waivers or other concessions. They must be proportionate and may be up to 100% of rent and outgoings ordinarily payable. The concessions must be proportionate and based upon the tenant’s reduction in turnover.
  4. Waivers must be at least 50% (and sometimes more depending upon a landlord’s financial position) of the aggregate of negotiated waivers and deferrals. In other words, if the negotiated amount is $100,000, at least $50,000 must be waived. Notably, however, tenants may agree to waive the 50% minimum waiver.
  5. Deferrals must be amortised over not less than 24 months or longer if the term of the lease has more than 24 months to run.
  6. Outgoing concessions which landlords receive (e.g.reduction in rates or insurance premiums) must be passed on to tenants.
  7. Landlords should seek to share any benefit which they receive from the lenders during the pandemic, in a proportionate manner, with tenants. But, the application of this principle will be problematic.
  8. Landlords should consider waving recovering of other expenses payable by tenants which are unable to trade during the pandemic but will be permitted to reduce services to which the expenses would normally apply. Examples would include cleaning and gardening costs.
  9. Negotiated deferrals, other than for rent, should be payable over an extended period to avoid undue financial burden on the tenant. Repayment should not commence during the relevant period
  10. Landlords may not apply interest or other charges on rent which is waived or deferred.
  11. Landlords may not enforce personal guarantees for non-payment of rent or draw against cash bonds or claim against bank guarantees for non-payment of rent during the relevant period.
  12. Landlords should allow tenants to extend their leases by the amount of time involved in any rent waiver and deferral period to provide extra time to trade on existing lease terms during the recovery period.
  13. Landlords must agree to freeze rent increases other than rent based on turnover for the relevant period.
  14. Landlords must permit tenants to reduce opening hours or to cease trading, without penalty, because of the pandemic

Mediation

If landlords and tenants are unable to negotiate and agree on leasing arrangements as required by the Code or otherwise, the matter in question should be referred for mediation.  Mediation will be binding.

The Code of Conduct states that landlords and tenants must not use the mediation process to prolong or frustrate the “facilitation of amicable resolution outcomes”.

Conclusion

The Code will be implemented by State and Territory legislation which, hopefully, will be uniform. Adherence to it will be mandatory. But, that does not mean, for example, that the law will require landlords and tenants to reach an agreement. Rather it will require them to attempt to do so in good faith. If an agreement cannot be reached, the parties must go to mediation.

The Code makes no mention of penalties for non-compliance. But it would be reasonable to expect State and Territory legislation to contain penalties for breaches the Code.  Will it be a punishable offence for a landlord to refuse to negotiate? Will it be a punishable offence for a tenant to knowingly produce inaccurate financial information during negotiations or mediation? Predictably, “YES”.

If any landlords and tenants require assistance in negotiating commercial leasing relief, then please contact Bill Purcell, Jacob Duane or Daniel Ronan in our Property and Real Estate team.

 

 


Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

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