Commercial Leasing Code During COVID-19
The National Cabinet on or about 3 April 2020 issued a mandatory code of conduct (the “code”) to govern commercial tenancies affected by the COVID-19 pandemic.
The purpose of the code is to impose a set of good faith leasing principles for application to commercial tenancies between landlords of commercial premises and tenants where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.
The code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s Jobkeeper programme with an annual turnover of up to $50 million.
The code has been developed to enable a consistent national approach, timely and efficient application given the rapid and severe commercial impact of official responses to the COVID-19 pandemic.
The code sets out both overarching and leasing principles required to be applied to negotiating amendments in good faith to existing leasing arrangements between landlords and tenants as a result of the significant impact and commercial disruption caused by Commonwealth and State Governments responses to the declared COVID-19 pandemic.
The parties to the code agree that during the COVID-19 pandemic period, these principles should apply in spirit to all leasing arrangements for affected business having fair regard to the size and financial structure of those businesses.
The following overarching principles are to guide such arrangements between landlords and tenants;
Landlords and tenants share a common interest in working together, to ensure business continuity and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during the recovery period.
Landlords and tenants will be required to discuss relevant issues to negotiate appropriate temporary leasing arrangements and to work towards achieving mutually satisfactory outcomes.
Landlords and tenants will negotiate in good faith.
Landlords and tenants will act in an open honest and transparent manner and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the code.
Any agreed arrangements must take into account the impact of COVID-19 pandemic on the tenant with specific regard to its revenue, expenses and profitability. Such arrangements must be proportionate and appropriate based on the impact of the COVID -19 pandemic plus a reasonable recovery period.
The parties will assist each other in their respective dealings with other stakeholders including governments, utility companies and banks/other financial institutions in order to achieve outcomes consistent with the objectives of this code.
All premises are different as are their commercial arrangements. It is therefore not possible to form a collective industry position. All parties recognise the intended application, legal constraint and the spirit of the Competition and Consumer Act 2010.
The parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under this code.
All leases must be dealt with on case by case basis considering factors such as whether the SME tenant has suffered financial hardship due to the COVID -19 pandemic; whether the tenant’s lease has expired or is soon to expire and whether the tenant is in administration or receivership.
- Leases have different structures, different periods of tenure and different mechanism for determining rent. Leases may already be in arrears, have expired and be in “hold over”. These factors should also be taken into account in formulating any temporary arrangements in line with the code.
As the objective of the code is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership and the application of the code modified accordingly.
Additionally, the code sets out the following leasing principles to guide landlords and tenants in negotiating and enacting appropriate temporary arrangements as soon as possible on a case by case basis;
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 to their rental agreement negotiated under the code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant 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 case by case basis based on the reduction in the tenant’s trade during the COVID-19 pandemic and subsequent reasonable recovery period.
Rental waivers must constitute not less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfill their ongoing obligations under the lease agreement. Regard must also be had to the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for 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 not less than 24months, whichever is the greater unless otherwise agreed by the parties.
Any reduction in statutory charges (e.g. land tax, Council rates) or insurance will be passed on to 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 provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response or any other case by case deferral of loan repayments offered to other landlords 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 in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles # 3,4 and 5 all-inclusive above.
Landlords must not draw on a tenant’s security for non-payment of rent (be this is 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 outlined in principle # 2 above. This is intended to provide the tenant additional time to trade on existing lease terms during the recovery period after the COVID-19 pandemic 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 recovery period notwithstanding any arrangements between the landlord and the tenant.
Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
Where landlords and tenants cannot reach agreement on leasing arrangements as a direct result of the COVID -19 pandemic, the matter should be referred and subjected to applicable state or territory retail/commercial leasing dispute resolution processes for a binding mediation including Small Business Commissioners/Champions/Ombudsmen where applicable.
The parties must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
Source: National cabinet mandatory code of conduct, SME commercial leasing principles during COVID-19.
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