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National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (Code of Conduct)

The National Cabinet announced a new mandatory Code of Conduct to apply to retail, office and industrial commercial leases during the COVID-19 pandemic (commencing from 3 April 2020). The purpose of this Code of Conduct is to impose a set of good faith leasing principles between current landlords and eligible tenants.

Code of Conduct

The National Cabinet announced a new mandatory Code of Conduct to apply to retail, office and industrial commercial leases during the COVID-19 pandemic (commencing from 3 April 2020). The purpose of this Code of Conduct is to impose a set of good faith leasing principles between current landlords and eligible tenants.

Eligible tenants are those businesses that meet the eligibility criteria for the purposes of the Commonwealth Government’s JobKeeper programme and have an annual turnover of less than $50 million.

Businesses eligible for the JobKeeper programme are businesses that are able to demonstrate a drop (or anticipated drop) of over 30% in their turnover (of at least a month), generally by reference to the fall from the relevant month in the previous year.

The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).

The Code will be given effect through relevant State and territory legislation or regulation that is yet to be introduced.

Brief Summary of the Code of Conduct

Landlords must not terminate leases, draw on bank guarantees or security deposits, apply any interest on unpaid monies.

Landlords must provide proportionate rental reductions to tenants. With respect to rental reductions, rental waiver/rent free period must constitute at least 50% of the percentage representing the reduction in the tenant’s revenue compared to the previous year, with the remaining 50% to be applied by way of rental deferrals payable over 24 months after the ending of the COVID-19 pandemic period and any subsequent recovery period.

Landlords must pass any discounts on land tax, rates or charges to their tenants.

Landlords should agree to freeze rent increases for the period of the COVID-19 pandemic and a reasonable subsequent recovery period (turnover-based rent increases are excluded).

Tenants should be provided with the opportunity to extend their leases for a period representing any rental deferral or rent abatement period to allow tenants to repay any rental deferrals.

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

Tenants must otherwise comply with their obligations under their lease at all times.

Landlords and tenants must negotiate in good faith and provide accurate information.

Disputes in relation to the application of the Code of Conduct must be dealt with by way of binding mediation.

The Principles Guiding Arrangements under the Code of Conduct

The following overarching principles of this Code will apply in guiding the above arrangements between tenants and landlords:

1. Landlords and tenants share a common interest in working together to ensure business continuity and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic and during a reasonable recovery period.
2. Landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes.
3. Landlords and tenants will negotiate in good faith, act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with this Code.
4. Any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability.
5. The parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of the Code of Conduct.

How effective will the Code of Conduct be?

There are so many relevant factors, including the extent and length of government restrictions and the resilience of business through this ever-growing period of economic uncertainty.

If any landlord or tenant needs help in understanding or negotiating retail or commercial leasing relief, please contact Julie Briscoe or Hourie Khdrlarian in our property team.

Julie Briscoe

Polczynski Robinson