The Commonwealth Code of Conduct for Commercial Leasing
The Australian Federal Government recently released a mandatory Code of Conduct in relation to commercial tenancies (‘the Code’), to be implemented and incorporated into legislation by each State and Territory in response to growing economic downturn from the COVID-19 pandemic.
The Code provides good faith principles to be used in negotiations between small to medium business tenants and their landlords, for businesses that hold commercial leases and who have been financially adversely affected by COVID-19. The Code is intended to facilitate discussions between eligible tenants and landlords, to work together to reach leasing arrangements during the pandemic that are proportionate to the impact the pandemic has on the tenant. To promote and support the Code, each State and Territory will implement a ‘Code Industry Committee’. Parties are encouraged to enter into discussions and variations to their lease agreements appropriate to their circumstances.
Eligibility Criteria and Duration
For the Code to apply, the SME tenants must have an annual turnover of less than $50 million and be suffering financial stress or hardship as a result of the pandemic. The Code will automatically apply to a small to medium sized business that is eligible for the JobKeeper program (the key criteria being if the business’ turnover has reduced by more than 30%). The Code will be enforceable for the duration of the Commonwealth’s JobKeeper program (‘the Pandemic Duration’).
Good Faith Leasing Principles
Drawing on the principle of good faith, the Code encourages businesses to continue paying rent where possible. Where applicable, the Code provides eligible business and their landlords a framework within which an agreement about their lease can be reached on a case by case basis. Parties are to consider the leasing principles summarized as follows:
- A landlord cannot terminate a lease due to the tenant’s failure to pay rent during the Pandemic Duration and during a ‘reasonable subsequent recovery period’. It is unclear how long this reasonable recovery period will be.
- Tenants must adhere to the terms and conditions of their lease to afford protection under the Code.
- Landlords must offer proportionate reductions in rent such as waivers and deferrals, and cannot charge any subsequent fees, interest, charges or seek to recoup the reduced amount. The proportions are to be assessed on an individual case basis, based on the tenant’s reduction in trade during the Pandemic Duration and a reasonable recovery period. Rental waivers must make up at least 50% of this total rent reduction, and must be a higher proportion of the total rent reduction where relevant. For example, if a tenant has lost 100% of their revenue due to the pandemic, then at least 50% of the rent relief is a rental waiver, and the remaining rent is to be deferred.
- A tenant must be given either the balance of the lease term or at least 24 months to pay back any rent deferrals, whichever period is greater. Parties can also reach an alternative agreement.
- Any reduction in statutory charges such as land tax, council rates and insurance must be reflected in an appropriate proportion to the tenant. Further, any benefit received by the landlord such as deferred loan repayments should be reflected in the agreement with the tenant.
- Landlords are advised not to recover expenses from tenants when the tenant is unable to trade, although services may be reduced in this time.
- Any repayment by the tenant should not occur until the COVID-19 pandemic is over or the lease is expired, whichever event occurs earlier.
- A landlord may not use the tenant’s security for non-payment of rent during this time.
- The tenant is to be offered the option to extend the lease for a further period equivalent to the rent waiver or deferred period.
- A landlord will not increase the rent for the Pandemic duration and the reasonable recovery period, unless agreed otherwise or subject to retail turnover rent.
- Landlords cannot penalize the tenant for reducing their trading hours or ceasing trade due to the pandemic.
Victorian State Government Response
On 15 April 2020 Victorian Premier Daniel Andrews announced Victoria’s $500 million package in relation to residential and commercial tenancy arrangements. The Victorian Government is providing $420 million in land tax relief, meaning that Landlords offering rent relief to their affected tenants will be eligible for a 25% discount on land tax, and payment may be deferred until March 2021.
These measures are in addition to the current moratorium on evictions of residential and commercial tenants due to non-payment of rent. For further information in relation to the moratorium on evictions please refer to the article on our website, detailing the six-month moratorium in place.
Practical Tips Moving Forward
The above elements identified in the Code are considered the minimum arrangements between an eligible tenant and landlord, and parties are encouraged to negotiate to reach mutually agreeable solutions. Where parties are unable to reach a solution, the dispute is to be referred to a binding mediation process.
The Code advises parties to implement the above leasing principles as soon as practicable. Parties must consider whether the Code is applicable to their situation, and review the terms of their current lease and the remaining term of the lease before engaging in negotiations to address the individual principles. Landlords and tenants alike should consider their current and estimated future income and expenses as the pandemic continues. Parties are reminded that the above principles provide a minimum framework in which discussions may take place, and will be implemented in legislation by the relevant State and Territory Governments.
It is important to note that tenants and landlords who are not covered by the Code may still enter into negotiations to address the effects of the pandemic. For these parties, the Code provides a useful structure for discussions moving forwards.
The above information has been provided for your information and is not to be relied upon as legal advice. If you wish to discuss your specific situation or would like assistance in reaching an agreement with your respective tenant or landlord, contact our team of solicitors today.
LGM Advisors is a leading commercial litigation Melbourne professional law firm, the experts to contact when you require commercial lawyers and employment lawyers. LGM Advisors have the skills, experience and expertise to ensure that you and your dispute is consulted upon with the utmost professionalism. Contact LGM Advisors today on (03) 9832 0608 or by email at contact@lgmadvisors.com.au.
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