• National Cabinet announces mandatory commercial tenancy code.
• Formula for rent relief by the same proportion as the loss of revenue experienced by the tenant.
• 50% of rent relief must be given in the form of a rent waiver, balance can be spread over the life of the lease (not less than 24 months).
• Good faith negotiations to apply.
• Mediation process available in the event of failure to agree.
• Code to be introduced through legislation or regulation by State and Territory Governments
• Banks to be required to support real estate debt covenants.
• Lease terminations taken off the table.
• No details on any tax support, States and Territories may assist.

National Cabinet has today settled the detail of a mandatory code of conduct for SME commercial tenancies for the COVID-19 period.

The highlights of the Code of Conduct are set out in this update.

The Code sets out good faith leasing principles to guide discussions between commercial landlords and tenants (including retail, office and industrial) who are significantly affected by COVID-19 crisis.

It will apply where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme and has a turnover of less than $50 million.

These principles will apply to negotiating amendments in good faith to existing leasing arrangements as a result of the impact and commercial disruption caused by the economic impacts of industry and government responses to the declared Coronavirus (“COVID-19”) pandemic.

The Parties to this Code concur that during the COVID-19 pandemic period, the principles of this Code should apply to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.

The Code requires landlord’s to provide rental relief to qualifying tenants by the same proportion as the loss of revenue experienced by the tenant. Half of this rent relief must be given in the form of a rent waiver, while the other half can be a deferral of rent spread over the life of the lease and not less than 24 months.

Under the Code, landlords must not terminate the lease due to non-payment of rent during the COVID-19 pandemic period or draw on the security provided by the tenant, e.g, bank guarantee or security deposit. Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.

All leases must be dealt with on a case-by-case basis, considering factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic; whether the tenant’s lease has expired or is soon to expire; and whether the tenant is in administration or receivership.

The Code is to be introduced through legislation or regulation by State and Territory Governments. The Code is not intended to supersede such legislation, but aims to complement it during the COVID-19 crisis period.

In the event that the parties cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation. Landlords and tenants must not use mediation processes to prolong or frustrate the process. 

The Federal Government has also accepted that financial institutions will need to support property companies regarding their debt covenants.

Other highlights from the Code include:

• Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of not less than 24 months, unless otherwise agreed by the parties.

• Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable.

• Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.

• If the negotiated arrangements under this Code require repayment, this should occur over an extended period. No repayment should commence until the earlier of the COVID-19 pandemic ending or the existing lease expiring.

• No fees, interest or other charges should be applied with respect to rent waived or on deferrals.

• Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic notwithstanding any arrangements between the landlord and the tenant.

• Whilst not referred to in the announcement any such arrangements would need to be properly documented, possibly by way of a Variation to the existing Lease, executed by the parties and possibly registered.

This article has been prepared with the kind assistance of the Property Council of Australia and was arranged by Geoffrey Learmonth, Founder and a Director of LPC.