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Mandatory Code of Conduct for Commercial Tenancies

Wednesday, 8 April 2020

On 7 April 2020, the National Cabinet released a mandatory Code of Conduct for application to commercial tenancies (including retail, office and industrial) as a result of the impact and disruption caused by the industry and governmental responses to the COVID-19 pandemic.

Who does the Code of Conduct apply to?

The Code of Conduct applies to all non-residential tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic. Whether a tenancy is required to abide by the Code will be determined by reference to the tenant’s eligibility for the Federal Government JobKeeper program, with an annual turnover of up to $50 million.

The $50 million annual turnover threshold will be applied in respect of:

  • franchises at the franchisee level; and
  • retail corporate groups at the group level (rather than at the individual retail outlet level).

Tenants who satisfy the turnover threshold and are eligible to receive the JobKeeper payment are automatically considered to be in financial distress under the Code.

The Code will apply from the date determined by each state (after 3 April 2020), continue in force for the entire period during which the JobKeeper program is operational and be implemented by legislation or regulation in each state and territory.

Overarching Principles

The following principles will apply to guide landlords to agree on tailored and appropriate temporary arrangements for each tenant, considering their individual circumstances on a case-by-case basis:

  • The parties should work together to ensure business continuity and facilitate the resumption of trading activities during the recovery of industries following the COVID-19 pandemic.
  • The parties will negotiate in good faith and work together to agree on appropriate temporary leasing arrangements.
  • The parties will be open, honest and transparent in providing sufficient and accurate information within the context of negotiations. This includes accounting records and information provided to or received from financial institutions.
  • Any agreed arrangements will take into account, and be proportionate to, the impact of the COVID-19 pandemic on the tenant’s revenue, expenses and profitability.
  • The parties will assist each other in dealing with other stakeholders including governments, utility companies and financial institutions.
  • All leases must be dealt with on a case-by-case basis with consideration of the impact of the COVID-19 on the tenant, whether the lease is close to expiry and whether the tenant is the subject of insolvency arrangements.

Specific Principles

In negotiating and enacting temporary leasing arrangements, the following principles should be applied as soon as practicable:

  1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic and recovery period.
  2. Subject to any temporary arrangements, tenants must remain committed to, and bound by, the terms of their lease. Material failure to abide by the terms of their lease will forfeit any protections provided under the Code of Conduct.
  3. Landlords must offer reductions in rent (by either waiver, deferral or a combination of both) proportionate to the reduction in the tenant’s trade during the COVID-19 pandemic and recovery period. Any amount of reduction by waiver may not be recouped by the Landlord over the term of the lease.
  4. Rental waivers must constitute no less than 50% of the total reduction in rent under item 3 above. A tenant may waive this requirement by agreement.
  5. Rental deferrals may comprise the balance of the total reduction but 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.
  6. Any reduction in statutory charges (e.g. land tax and rates) or insurance shall be passed onto the tenant in the proportion specified under the terms of the lease.
  7. Landlords should share any benefit they receive by way of deferral of loan payments with tenants in a proportionate manner.
  8. Landlords should reduce services during the period that tenants are unable to trade and, where appropriate, seek to waive recovery of outgoings and other expenses from tenants.
  9. No repayment should commence until the Federal Government declares the end of the COVID-19 pandemic.
  10. No fees, interest or other charges should be applied with respect to waivers or deferrals.
  11. Landlords must not draw on tenants’ security (whether by cash bond, bank guarantee or personal guarantee) for non-payment of rent during the COVID-19 pandemic and recovery period.
  12. Tenants should be provided with the opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period to allow additional time to trade on existing lease terms.
  13. Rent increases must be frozen (except retail leases based on turnover rent) during the COVID-19 pandemic and recovery period.
  14. Landlords may not enforce any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

Mediation

Where parties cannot reach agreement of temporary leasing arrangements under the Code of Conduct, the matter should be referred to dispute resolution processes for binding mediation.

Next Steps for Landlords

In order to determine whether each tenant is eligible to receive relief under the Code of Conduct, it is important to determine whether the tenant is eligible for JobKeeper and falls under the $50 million turnover threshold.

To be eligible for JobKeeper, tenants must demonstrate that their turnover has fallen by more than 30% for at least a month, when compared to the same period a year earlier. As noted above, retail corporate groups are to have their turnover assessed at a group level, meaning that large chains may not be entitled to relief under the Code of Conduct.

Accordingly, we recommend that responses to tenants include a request for the following information:

  • Confirmation as to whether the tenant has applied for the JobKeeper program;
  • An overview of trading impact to date as a result of COVID-19;
  • Details of any measures implemented in their business to cope with COVID-19;
  • Details of support offered by financiers and/or suppliers of their business;
  • A current statement of financial position or balance sheet for their business; and
  • Evidence of turnover in their business for the relevant period 12 or 24 months prior.

Once this information has been provided, landlords will need to assess tenants on a case-by-case basis to confirm eligibility and determine the proportionate relief to be provided. This will most likely need to be retrospectively calculated and resolved in arrears.

If you would like advice on complying with the Code of Conduct or require assistance in administering the principles set out in the Code of Conduct, please contact Hickey Lawyers on (07) 5556 7400.

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