Mandatory Code of Conduct for commercial leasing during COVID-19

The States and Commonwealth Governments recently agreed on a mandatory Code of Conduct to impose a set of “good faith” leasing principles for commercial tenancies that are suffering financial hardship due to COVID-19.

The Code applies to commercial tenancies including retail, office and industrial and between owners/operators/other landlords and tenants to help share the burden of declining turnover.

The Code particularly applies to tenants in financial hardship that:

1. Have an annual turnover of up to $50 million
2. Are eligible for the Commonwealth Government’s JobKeeper program

The Code came into effect in all states and territories from a date following 3 April 2020 “to be defined by each jurisdiction, for the period during which the Commonwealth JobKeeper program remains operational”.

Principles of the Code

The objective of the Code is to share, in a proportionate, measured manner, the financial risk and cash flow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords. 

Landlords will agree tailored, bespoke and appropriate temporary arrangements for each tenant, taking into account their particular circumstances on a case-by-case basis.

The overarching principles are:

• Work together to ensure business continuity and the resumption of normal trading activities throughout COVID-19 and during a reasonable recovery period
• Work towards achieving mutually satisfactory outcomes
• Negotiate in good faith
• Act in an open, honest and transparent manner, providing sufficient and accurate information
• Agree on arrangements that are proportionate and appropriate based on the impact of COVID-19 plus a reasonable recovery period

The full set of principles can be found at the Prime Minister’s website.

Leasing principles

The Code also sets out a number of leasing principles. Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), either party can refer the matter to applicable state or territory dispute resolution processes for binding mediation.

For tenants:

1. Leases cannot be terminated due to non-payment of rent during the COVID-19 pandemic period.
   
2. Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code.
   
3. Rent reductions in the form of waivers or deferrals, with the amount based on the reduction in trade.
   
4. Rental waivers 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 fulfil their lease obligations.
5. Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.

For landlords:

Leasing principles that specifically apply to landlords include:

1. Cannot terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable recovery period).
2. Reductions in statutory charges (land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion.
3. Seek to share any benefit received due to deferral of loan payments with the tenant in a proportionate manner.
4. Seek to waive recovery of any other expense (or outgoing payable) during the period the tenant is not able to trade.
5. Repayments for arrangements made under the Code should occur over an extended period. No repayment should commence until the earlier of the COVID-19 pandemic ending or the lease expiring.
6. No fees, interest or other charges should be applied with respect to rent waived or deferred.
7. Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee).
8. Freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period.

For a full list of principles and definitions, see: ‘National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19’.

How these principles translate into regulations for commercial tenants in NSW will depend on the shape of the final legislation. Foye Legal will provide updates as more information comes to hand. 

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