Mandatory Code of Conduct for Commercial and Retail Leases during the COVID-19 pandemic

On 7 April 2020, the National Cabinet released the Mandatory Code of Conduct (“Code”) for commercial tenancies during the COVID-19 pandemic period.^[1] While we are yet to see how the individual State jurisdictions will implement it and some fine tuning is expected, here is DSA Law’s summary of the key points.

1. What is the purpose of the Code?

The purpose of the Code is to:

• ensure that landlords and tenants share a common interest in:
  • working together,
  • the promotion of business continuity,
  • the negotiation of temporary arrangements, and
  • working towards achieving mutually satisfactory outcomes;
• set good faith principles between landlords and tenants; and
• facilitate open, honest and transparent communication between landlords and tenants, with the objective that financial risk and cash flow impacts are shared proportionately between landlords and tenants.

The Code is closely connected with the national JobKeeper program.

2. Eligibility: Are you eligible?

The Code applies to commercial tenancies, broadly defined to include retail, office and industrial tenancies.

To be eligible, the tenant must:

• have an annual turnover of less than $50 million AUD; and
• have suffered, or be suffering, financial stress or hardship as a result of COVID-19. If your business is deemed eligible for the JobKeeper programme, the Code applies automatically to you.

Furthermore, the annual turnover threshold test is only intended to be applied for franchises at the individual franchisee level, as opposed to retail corporate groups, for which it applies to the group as a whole.

3. Leasing Principles: What are they?

The key leasing principles include:

Non-Termination

Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic and the reasonable recovery period (Relief Period). It is yet to be made clear whether this applies only to leases falling under the Code, or a wider mandate.

Commitment

Tenants must remain committed to their leasing arrangements, subject to negotiation in accordance with the Code. This appears to warn tenants not to misuse the Code for unfair advantage.

Proportionality

Landlords must offer tenants rent reductions proportionate to tenants’ reduced trade during the Relief Period. Any reductions in statutory charges and insurances must flow through to tenants proportionate to their obligations to pay those amounts as outgoings.

Rental Waivers & Deferrals

Any agreed rental waiver and deferral should continue for the entire Relief Period.

• Waivers (that is, rent that the landlord will never require to be paid) must be at least 50% of the total reduction in rent negotiated.
• Deferred rent (that is, rent the landlord still claims but will wait to be paid when the business recovers after the Relief Period) must be spread out equally over the balance of the lease term or 24 months, whichever is greater.

Security

Landlords are precluded from drawing on a tenant’s security for non-payment of rent during the Relief Period.

Penalties

Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

Rent Freeze

Landlords are to freeze rent increases for the Relief Period.

Extension of Lease

Tenants should be provided an opportunity to extend their lease for a period equivalent to the Relief Period.

4. Sufficient Information: What Tenants should know

If you intend to rely on the Code, landlords may ask for ‘sufficient and accurate’ information to support your claim. As a tenant, you should be prepared to provide evidence such as:

• proof that your business’ annual turnover is less than $50 million AUD;
• evidence that your business is eligible for the JobKeeper programme (e.g., ATO approval or submission showing a 30%+ decline in revenue);
• financial reports certified by an accountant stating income, expenditure, assets and liabilities; and
• a financial report showing your business’ current cash flow trajectory, including significant anticipated revenue changes.

Landlords may also request:

• any insurance policies covering losses or liabilities during the Relief Period;
• statements from your accounting system; and
• statements from financial institutions.

5. Negotiations: What may happen?

Landlords and tenants should communicate openly and attempt to negotiate the best mutual outcome possible based on the Leasing Principles. A ‘one-size-fits-all’ approach should not be adopted, as tenant circumstances differ.

For example, a qualifying tenant that experiences a 60% loss in turnover would be guaranteed 60% rent relief. This relief may provide that:

• at least half of the rent reduction is waived during the cashflow relief period; and
• at most half can be deferred rent, which may be repaid over a minimum of 24 months or the remainder of the lease term, whichever is greater.

These are guidelines — landlords and tenants may agree to alternative arrangements. If parties cannot agree, disputes will be referred to binding mediation. In Victoria, this is likely through the Victorian Small Business Commissioner.

Key Takeaways

• Landlords should be prepared to negotiate with qualifying tenants in accordance with the Code.
• Tenants should maintain updated financials to substantiate any decline in revenue or income.
• The Code aims to fairly redistribute financial risk and cash flow impacts between landlords and tenants.
• The Code’s application depends on how each State or Territory legislates it.

How can DSA Law help?

There are many scenarios that may arise during this time, and navigating them can be complex. DSA Law has the expertise to guide you through this evolving landscape.

If you require assistance with your rights and obligations under the Code, please Contact DSA Law on (03) 8595 9580.

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Mandatory Code of Conduct for Commercial and Retail Leases during the COVID-19 pandemic

^[1] Scott Morrison, Update on Coronavirus Measures, Prime Minister of Australia (Web Page, 7 April 2020) <