Covid-19 Commercial Lease Update – the National Code of Conduct

On Tuesday 7 April, the Prime Minister announced the introduction of a Mandatory Code of Conduct for Commercial Leases. As commercial and retail leasing is governed by state legislation, each state will need to make amendments to their own legislation to put the Code into law. However, tenants and landlords can now use this Code as a guide to their own negotiations.

We have provided a summary of the Code to assist commercial tenants to understand their rights, options, and to assist them with their own negotiations.

Who does the Code apply to?

Compliance with the Code is mandatory for tenants or landlords (ie, tenants who have sub-tenants) who:

  • Have a turnover of $50 million or less, and
  • Are eligible for the JobKeeper package.

The eligibility requirements for the JobKeeper package vary across sectors, but for businesses with a turnover of $50 million, revenue must have dropped by 30%.

Rent Reduction and Negotiation Guidelines

The Code requires that tenants be granted a reduction in rent in proportion to the tenant’s turnover, and up to 100% of rent payable.
Where parties negotiate a rent reduction, at least 50% of that rent reduction must be a rent waiver. For example, if a tenant has experienced at 50% drop in revenue, the landlord must waive at least 25% of the rent payable during the pandemic period.

Where a tenant requires more than a 50% waiver of the agreed rent reduction in order to fulfil their lease obligations, the parties should negotiate this. An example of this would be a scenario where a tenant is no longer able to lawfully operate their business – for example where the tenant operates a nail salon, gym or other business that is prevented by Stage 3 restrictions from trading.
In such scenarios, the tenant may require a rent waiver that constitutes more than 50% of the agreed rent reduction to enable them to comply with their lease. This can be contrasted to a scenario where a tenant’s revenue has dropped but they are able to operate in a reduced or changed capacity.
Where the parties agree to a rent deferrals (ie, deferring the payment of rent until a later date), the payment of deferred moneys must be spread over the greater of 24 months, or the remainder of the lease.

Restrictions on Landlord Actions

  • Landlords cannot terminate lease for non-payment of rent during the pandemic period, and during a reasonable subsequent recovery period.
  • Landlords similarly cannot draw on tenant security for non-payment of rent during the pandemic period, and reasonable subsequent recovery period.
  • Where rent is deferred or waived for a period of time, landlords must provide tenants with the opportunity to extend their lease by that same period, on the same terms, to facilitate the recovery of their business.
  • There is a freeze on rent increases for the duration of the pandemic and a reasonable suitable recovery time.
  • Tenants must substantially comply with their lease, subject to the temporary variations that the Code allows. If they fail to comply with their lease, they may forfeit the protections the Code provides.

Negotiation terms

The Code requires that landlords and tenants negotiate in good faith, and act reasonably, honestly and transparently. Tenants must therefore provide true and accurate figures and records when seeking to rely on and negotiate in accordance with the Code.

The parties must take into account specific circumstances of each tenant and provide an appropriate arrangement which is proportionate to the impact of the pandemic on the business, and allows for a reasonable recovery period.

Where parties cannot agree on a suitable agreement, they can apply to the appropriate state based dispute resolution process for mediation, which will provide a binding result.

Further Reading and Information

The full text of the Code can be viewed online here.

For further information about the JobKeeper package and eligibility requirements, click here.

If you need assistance to negotiate with your landlord, or to understand your rights and options in relation to a retail or commercial lease, book in a free 15 minute consult, or a reduced fee strategy session by clicking here.

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