Commercial lease code of conduct during covid-19

The National Cabinet has agreed that States and Territories will implement a mandatory Code of Conduct in the commercial property sector. Note the emphasis on the word ‘mandatory’.

The Code is intended to provide a proportionate and measured burden share between landlords and tenants while still allowing tenants and landlords to agree to tailored, bespoke and appropriate temporary arrangements that take account of their particular circumstances.

The overriding principle is that rent reductions are to be based on the tenant’s decline in turnover to ensure that the burden is shared between landlords and tenants.

Read the official release from the PM

Key Points

1. Important to understand this NOT a dollar amount economic stimulus measure but a Code of Conduct that will be legislated – all part of the ‘hibernation strategy’.
2. Only applies to Commercial Tenancies – residential tenancies have been passed back to each state and territory to deal with - meaning there is no uniform approach for residential tenants.
3. The purpose of the Code is to impose a set of good faith leasing principles for application to commercial tenancies landlords and tenants
4. Tenant is a small-medium sized business (annual turnover of up to $50 million) and is an eligible business for the purpose of the Federal Government’s JobKeeper program
5. National Cabinet expects Australian and foreign banks and any other financial institutions operating in Australia, to support landlords and tenants with appropriate flexibility as they work to implement the mandatory Code.
6. Head tenants are expected to pass any rent relief onto their sub-tenants
7. While the code does not allow a landlord to evict a tenant or tenant to break a lease if a landlord fails to negotiate, they will lose access to concessions such as land tax or council rates relief or loan repayment holidays offered by banks. In such a scenario, a tenant would be able to break their lease.

Principles of the code include:

1. Landlords and tenants must agree to these terms – this is not an automatic application – this is a Code of Conduct. Where agreement cannot be reached, the matter will be referred to the appropriate State and Territory mediation process.
2. Landlords are barred from terminating lease or drawing in a tenant’s security bonds, etc
3. Tenants must remain committed to the lease – material failure to do so will forfeit any protections provided to the tenant under this Code
4. Reductions in rent to be in proportion with falls in the revenue of the business conducted by the tenant
5. Reductions in rent to come in the form of waivers or deferrals – this is to be done on a case by case basis;
   1. Rent waivers must account for at least 50% of the rent reduction (can be more –
      cannot be less) during the COVID-19 pandemic period AND for a reasonable
      recovery period post the crisis.
   2. Rent deferrals to be repayable over the remaining terms of the lease or 24 months
      – whichever is greater (subject to a different agreement by both parties);
      1. 18 months remain on the lease, deferral payable over 24 months;
      2. 36 months remain on the lease, deferral payable over 36 months’
      3. Both parties can agree to a different arrangement
6. Any reductions in statutory charges (land tax, rates,) or insurance to be passed onto the tenant.
7. If a landlord receives a benefit under the Banking COVID-19 response measures, the landlord needs to share that benefit with the tenant in a proportionate manner
8. If a tenant is not able to trade, the landlord should seek to waive recovery of any outgoings payable (eg cleaning). The landlord can reduce such service in these circumstances
9. Any repayments which are required under these new arrangements – have to occur over a period of time and are not required to commence until the earlier of the COVID-19 period ending or lease expiry. Eg if it is agreed to repay a portion of the outgoings later etc.
10. Landlords are not allowed to charge interest, fees or any other charges with respect to rent waivers, reductions or deferrals.
11. Landlords to agree to a freeze on rent increases (unless a retail turnover-based lease is in
    place) for the duration of the COVID-19 period AND a reasonable subsequent recovery
    period.
12. The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.

EXAMPLE 1:

- Assume an eligible tenant pays $5,000 per month in rent
- They also pay $500 of cleaning outgoings
- Remaining lease term is 16 months
- Their business has completely closed down – turnover down 100%
- They satisfy the JobKeeper conditions, etc

Application of the Code

- Tenant and landlord agree on the terms of the new arrangement
- At least 50% of the $5,000 pcm rent is to be waived (50% of the 100% drop in turnover)
- This rent payable is $2,500 per month - $2,500 is rent free per month
- The $2,500 per month to be deferred and payable over 24 months (even though the remaining lease is 16 months)
- Outgoings – landlord to seek to waive recovery and is entitled to stop the cleaning charges
- No fees, interest etc are payable on the rent waiver or the rent deferral
- Landlord to seek appropriate bank, state and local government relief and pass this on in the appropriate proportion

EXAMPLE 2:

- Assume an eligible tenant pays $5,000 per month in rent
- They also pay $500 of cleaning outgoings
- Remaining lease term is 16 months
- Their business has suffered a downturn of 30%
- They satisfy the JobKeeper conditions, etc

Application of the Code

- Tenant and landlord agree on the terms of the new arrangement
- At least 15% of the $5,000 pcm rent is to be waived (50% of the 30% drop in turnover)
- This rent payable is $4,250 per month - $750 is rent free per month
- The $4,250 per month to be deferred and payable over 24 months (even though the remaining lease is 16 months)
- Outgoings – landlord to seek to waive recovery and is entitled to stop the cleaning charges
- No fees, interest etc are payable on the rent waiver or the rent deferral
- Landlord to seek appropriate bank, state and local government relief and pass this on in the appropriate proportion