The National Cabinet have released the Mandatory Code of Conduct (“the Code”) on 7 April 2020. This code of conduct has been agreed to be implemented in all states and territories across Australia to try to combat some of the negative effects that commercial tenants are facing a result of Covid-19.

The purpose of this code is to impose leasing principles for landlords and tenants to adhere to whilst negotiating amendments to current lease arrangements. The idea is to regulate the cashflow and risk between landlords and tenants whilst balancing both interests in a proportionate manner where companies are facing financial hardship as a result of Covid-19.

WHO DOES THE CODE APPLY TO?

The code applies to all commercial, retail, office or industrial tenancies where the tenant is an eligible business for the purpose of the Jobkeeper programme. To be eligible under this programme businesses must have an annual turnover of less than $50 million whose turnover is estimated to decrease by 30% or more as a consequence of Covid-19. For those companies with turnovers over $50 million the government still intends that these practices will be adhered to in spirit.

WHEN DOES THE CODE TAKE EFFECT?

Each state and territory must implement this mandatory code by enacting it into legislation however these are not to take effect before 3 April 2020. The code is estimated to last as long as the Jobkeeper programme which is estimated at six months however may include a period for recovery.

WHAT ARE THE LEASING PRINCIPLES?

The following principles should be applied when negotiating and implementing temporary arrangements under this code and should be applied on a case-by-case basis. These principles are summarised below:

1. No termination

Landlords must not terminate leases if the tenant has not paid their rent during the Covid-19 pandemic period or reasonable subsequent recovery period.

2. Commitment to lease terms

Tenants must remain committed to the terms of their lease subject to any amendments negotiated under this code. If a tenant demonstrates a material failure to follow the substantive terms of their lease agreement then protections under this code no longer apply.

3. Proportionate reductions in rent

Landlord’s must offer tenants a proportionate reduction of rent payable either by waivers or deferrals up to 100% of the normal rent based on reduction in the tenant’s trade during the Covid-19 pandemic and the reasonable subsequent recovery period.

4. Waivers on rent reduction

Waivers on rent must be at least 50% of the total reduction of rent payable during Covid-19 and should be a greater proportion of reduction where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. The financial viability of the landlord must be taken into account when considering additional waivers.

5. Deferrals on rent

Deferrals of rent must be paid back the longer duration of either the remainder of the term of the lease and no less than 2 years unless otherwise agreed by the parties.

6. Reduction in charges

Any reduction in statutory charges including land tax and other levies are to be passed on to the tenant in their appropriate proportion under the lease agreement.

7. Benefits to Landlord passing on to tenants

Any benefits which a landlord may receive from a bank in deferring loan payments should be shared with the tenant in a proportionate manner.

8. Waiver of recovery of outgoings

Landlords should where appropriate waive recovery of additional expenses including outgoings by a tenant under the lease during the period the tenant is unable to trade. Landlords have the right to reduce services as required in such circumstances.

9. Repayment to landlord

If arrangements for rent deferral have been agreed under this code, the repayments should occur over an extended period of time to avoid undue financial burden on the tenant. Repayments should not commence until the earlier of the government announcing the end of the Covid-19 pandemic or the expiration of lease and taking into account the reasonable subsequent recovery period.

10. No interest on waiver or deferral

Landlords cannot charge interest or other fees in waiving or deferring rental payment.

11. No use of bond or bank guarantee

Landlords cannot use the security bond or bank guarantee for the non-payment of rent during the Covid-19 pandemic and reasonable recovery period.

12. Extension of lease

The tenant should be provided with an opportunity to extend the lease for an equivalent period of the rent waiver or deferral period. This is to provide the tenant additional time to trade on existing terms, during the recovery period once the Covid-19 pandemic concludes.

13. Freezing of rent increases

Landlords agree to freeze rent increases (except for retail leases based on turnover rent) for the duration of the Covid-19 pandemic and the reasonable recovery period regardless of arrangements between the tenant and landlord.

14. No adverse action if reduction or cessation of trade

Landlords may not apply any prohibition or levy any penalties if the tenants reduce opening hours or cease to trade due to the Covid-19 pandemic.

WHAT IS THE EFFECT OF THE CODE?

The code offers protections to retail, commercial, industrial and office tenants who fall within its eligibility criteria in being able to demonstrate the decline in turnover as a result of the Covid-19 epidemic. The code aims to balance the power between the tenants and landlords in situations of financial hardship caused by the Covid-19 pandemic which was not reasonably foreseen. The code contains principles which landlords and tenants should familiarise themselves with as this will soon be enacted in legislation or regulation.

Landlords and tenants have the ability to use these principles in reaching negotiations to manage their specific circumstances with the terms of the lease during this period. Failing agreement, parties may refer the matter to a dispute resolution process for binding mediation including through the Small Business Commissioner. However, these processes should not be used to prolong the facilitation of an amicable resolution.

There are still items which require clarity including how long the reasonable recovery period will last however it is likely that this may not yet be known as the uncertainty follows the spirit of the Covid-19 pandemic.

If you have any queries on how these new changes may affect you or your company as a tenant or a landlord, call Pannu Lawyers on (02) 9920 1787 to speak to one of our experienced lawyers to see how we can assist you. Pannu Lawyers is here to help you during this difficult situation remotely via Skype or telephone conferences.