COVID 19: National Cabinet Mandatory Code of Conduct for Commercial Tenancies

Yesterday afternoon the National Cabinet released a Mandatory Code of Conduct confirming the arrangements for commercial leases during the COVID-19 pandemic.  The Code will apply where the tenant has an annual revenue of less than $50m and is eligible for the JobKeeper program and confirms the principles that will apply to commercial tenancies including those announced on Friday 3 April, discussed in our previous post.

The Code will be given effect through state and territory legislation and will apply for the period during which the Commonwealth JobKeeper program remains operational.

Rental reductions

The Code requires a reduction of rent paid by tenants under commercial leases which is proportional to the amount that a tenant’s revenue has fallen as a result of the COVID-19 pandemic to be made up of waivers of rent and deferrals.  A rent waiver must account for at least 50 percent of the total rental reduction with the remaining amount to be provided in the form of rent deferrals.  The payment of rent deferrals may be amortised over the greater of the remaining lease term or a period of 24 months.

The Code suggests that rental waivers should form greater than 50 percent of the total rent reduction where not doing so would compromise a tenant’s capacity to fulfil their ongoing obligations under the lease agreement.  Regard is also to be had to the Landlord’s ability to provide additional waivers.

The objective of the Code is to share the financial risk and cash flow impact of COVID-19 between landlords and tenants, and balance their interests appropriately.

Additional principles under the Code

In addition to the reductions in rent, the following principles of the Code have been confirmed:

  • landlords and tenants are required to negotiate in good faith to agree upon appropriate temporary leasing arrangements, working toward mutually satisfactory outcomes. Where they are unable to do so, the Code dictates parties will enter mandatory mediation to resolve a rent reduction;
  • agreed arrangements are to take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses and profitability and be proportionate based on the impact on the tenant and a reasonable recovery period;
  • tenants must continue to honour their obligations under the lease, subject to any amendments negotiated under the Code;
  • there is a prohibition on termination of leases for non-payment of rent and a freeze on rent increases (except for turnover leases);
  • landlords are prohibited from penalising tenants who reduce trading hours or shutdown altogether as a result of COVID-19 restrictions on trade;
  • landlords are prohibited from charging interest on unpaid rent and passing land tax on to tenants; and
  • reduced statutory charges (such as land tax and council rates) are to be passed on to the tenant in the appropriate proportion applicable under the lease terms;
  • landlords are prohibited from making a claim in relation to a bank guarantee or security deposit for non-payment of rent; and
  • Legislative and administrative hurdles to lease extensions will be removed and landlords are encouraged to provide tenants with an opportunity to extend their lease for an equivalent period of the rent deferral.

Binding mediation

The Prime Minister has reiterated an urge for landlords and tenants to sit down and negotiate in order to reach mutually satisfactory outcomes.  Where landlords and tenants cannot reach an agreement on leasing arrangements, the Code imposes binding mediation on the parties.  Unresolved disputes may be referred by either party to the applicable state or territory retail and commercial leasing dispute resolution process for a mandatory mediation process with a binding outcome.

The National Cabinet has confirmed the Code will be legislated and regulated by each state and territory.  The Code will not cover residential tenancies.  States and territory governments remain responsible for governing those arrangements.

If you have any questions or seek advice in relation to the impact of COVID-19 on commercial tenancies please contact Stuart Jackson or Michael Garry.