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New Mandatory Code for Commercial Leases During COVID-19 April 9, 2020

On 7 April 2020, the Government released the much-anticipated Mandatory Code of Conduct (the Code) to apply to certain commercial and retail leases during the COVID-19 crisis.  The Code imposes a set of good faith leasing principles for landlords and tenants.  The overarching principles are to share, in a proportionate, measured manner, the financial risk and cashflow impact of COVID-19.

It is intended that landlords and tenants will agree upon temporary arrangements taking into account the particular circumstances on a case-by-case basis.

The Code is to be given effect through state and territory legislation.

Below is a summary of the provisions of the Code.  The summary is not intended to be exhaustive.

Who does the Code apply to?

The Code applies to a tenant who:

  • has an annual turnover of up to $50 million; and
  • suffers “financial hardship” as a result of the COVID-19 pandemic. A tenant is deemed to suffer financial hardship if it suffers a 30% reduction in turnover compared to the same period last year.

The Code will apply for the period during which the Commonwealth JobKeeper program is operational.

What must the Landlord do?

  • Landlords must reduce rent in proportion to the tenant’s reduction in turnover. For example, if the tenant has a 50% reduction in turnover, rent must be reduced by 50%.
  • The reduction in rent must be in the form of:
    • a waiver of rent representing at least 50% of the reduction. This component is not recoverable by the landlord.
    • The balance of the reduction may be a deferral of rent. This is recoverable on the earlier of the end of the COVID-19 pandemic or the expiry of the lease and is to be amortised over the greater of the balance of the lease term or 24 months.
  • Rent increases are frozen.
  • The landlord must pass on any reduction in statutory charges (e.g. land tax or council rates) or insurance it received in the appropriate proportion.
  • The landlord must share any benefit it receives for the deferral of loan payments from its bank in a proportionate manner with the tenant.
  • Tenants should be given the opportunity to extend its lease for an equivalent period of the rent waiver or deferral period.
  • Any agreement under the Code must be reduced to writing.

What must the Landlord not do?

  • The landlord must not terminate the lease for non-payment of rent.
  • The landlord must not make a claim on a bank guarantee or a security deposit for non-payment of rent.
  • The landlord must not penalise the tenant for ceasing trade or reducing trading hours.

What must the Tenant do?

The tenant must comply with the terms of the Lease, subject to any amendments agreed in accordance with the Code. A material failure by the tenant will forfeit any protections provided to the tenant under the Code.

Binding Mediation

Where the landlord and tenant cannot reach agreement under the Code, the matter may be referred to the applicable state or territory “retail/commercial leasing dispute resolution processes” for binding mediation.

Conclusion 

The Code must be the subject of legislation to be introduced in each state or territory.

Although the Code seeks to strike a balance between landlords and tenants, there is little doubt, the bulk of the burden of the Code is imposed upon landlords.

The COVID-19 legislative landscape seems to change by the day. Perhaps there will be further legislative changes in the coming days that will provide assistance to commercial landlords?

For further advice or information in relation to the Code and its impact upon commercial landlords and tenants contact our Director of Dispute Resolution, Scott Eustace, at [email protected]

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