Due to the economic effects of COVID-19 many commercial tenants are finding themselves suffering the impacts of reduced revenue, this in turn is forcing many businesses to close due to an inability to meet their obligations under their leases, creating issues and uncertainty for tenants and landlords alike. The Government has released a new Mandatory Code of Conduct that apply to certain commercial leases during the pandemic. The Code of Conduct sets out principles of negotiating and mandatory expectations of certain things landlords and tenants can and cannot do.
The Government has released a http://National Cabinet Mandatory Code of Conduct in early April 2020 to provide a framework that will apply to many commercial leases during the COVID-19 pandemic.
Does this apply to me?
Not all commercial leases are made equal and the Code of Conduct does not apply universally. In short, each tenant must meet all three of these criteria:
1. Is this tenant bound by a commercial lease? This Code of Conduct does not apply to residential leases.
2. Is the tenant’s annual turnover less than $50,000,000? If the tenant is a franchise, you calculate that number on the franchisee’s turnover, but if it is a retail corporate group, you use the group’s turnover.
3. Is the tenant suffering financial distress / hardship since the outbreak of COVID-19? If the tenant is eligible for payments under the federal government’s JobSeeker programme they are automatically considered to be in financial distress.
If a commercial tenant meets those three simple criteria, then they are covered by the Code of Conduct. This will continue till the conclusion of the federal government’s JobKeeper programme, though there is an undefined reasonable recovery period which elements of the Code of Conduct will apply to.
What does the National Code of Conduct actually do?
Rather than trying to constrain all commercial leases to the same set of rules, the Code of Conduct firstly provides 11 principles that apply in guiding tenants and landlords to reach an agreement. These principles boil down to requiring that the parties engage in honest and fair negotiations, take into account the realities of the situation, the parties and premises, and work towards the national economic goal that when the pandemic is over, businesses will be able to recover and go back to normal.
Secondly, the Code of Conduct provides 14 leasing principles that the Government expects landlords and tenants to incorporate into their arrangements during the pandemic on a case-by-case basis. This will be covered in the next section as it contains the most substance of the Code of Conduct.
Thirdly the Code of Conduct provides a process for either landlord or tenant to refer the dispute to a “binding mediation” if they cannot reach an agreement. The details of how the binding mediation will take place will vary from State to State and will be unveiled soon.
So what is my new tenancy agreement going to look like?
Ultimately each tenant and landlord has a unique commercial lease and will ultimately need a differently tailored agreement. It will still need to be compliant with other commercial laws and given the end date for the Code of Conduct is not fixed, should be carefully reviewed and drafted for both parties’ peace of mind and clarity.
However, there are some clear expectations in the Code of Conduct for the new agreements that apply to those eligible tenants. While there are 14 leasing principles, they can be largely summarised in four items:
1. There are to be no termination of leases or evictions due to non-payment of rent during the COVID-19 pandemic and recovery period. However, tenants are still expected to remain committed to the terms of their leases (subject to any amended agreement) or forfeit protection under the Code of Conduct.
2. Based on how much the tenant’s business has suffered an economic downturn during the relevant period, there is expected to be a proportionate reduction in payment of rent. At least half of that reduction is to be waived, with the rest merely deferred to a case-by-case payment plan that cannot be less than 24 months / the remainder of the lease, whichever is longer. Interest can apply to the deferred rent, but it, like the terms of the payment plan itself cannot place an undue burden on the tenant.
3. The landlord is to essentially pass on or share the benefit it receives by way of reduced taxes, rates, and insurance fees as well as deferred loan payments in an appropriate way that corresponds to the original agreement.
4. The landlord is not to raise rent during the pandemic period, draw on a tenant’s security for non-payment of rent, unfairly refuse to extend the lease, and apply penalties for a tenant reducing its opening hours.
If you believe you might be eligible for a rent reduction due to reduced turnover or you or are facing lost rent from a commercial tenant, call Ezra Legal today on 08 8231 6100 to book a meeting to discuss how we can help you negotiate the right outcome for your business. Having an experienced commercial lawyer provide you with tailored legal advice and prepare the right agreement for you will help your business be in the best shape it can be in when the COVID-19 pandemic is over.
Also, don’t forget to subscribe to our email list or Facebook page for further updates on how COVID-19 is impacting the industry and how this Code of Conduct develops.