Commercial Leases - Mandatory Code of Conduct in times of COVID-19

Updated: May 7

Legal and practical considerations for landlords and tenants


On 7 April 2020, the Federal Government released the National Cabinet Mandatory Code of Conduct for commercial leasing (Code).


The key aim of the Code is for the Government to highlight that landlords and tenants need to negotiate rental relief in good faith in accordance with their own unique lease circumstances in order to enable both parties to manage their businesses now and recover as COVID-19 restrictions are eased (when appropriate) and removed.



Application


The Code applies where a lease is in place for a business that is eligible to receive payment under the Federal Government’s JobKeeper scheme and will apply during the period for which the JobKeeper program remains in operation. The Code therefore applies to leases where:


  • the tenant is suffering financial stress or hardship as a result of the COVID-19 pandemic to the extent that it is eligible for the JobKeeper program (as defined in the Code, being a 30% (or more) reduction in revenue); and

  • the tenant’s business has an annual turnover of less than $50 million.


The date on which the operation of the Code takes effect in each State is determined by the implementation measures taken by the States - Queensland, Victoria and NSW are referenced below.


The Code also applies to sub-tenants and sub-lessors.


Leasing Principles


Some of the key leasing principles of the Code include:


  • Lease termination ban - there is a moratorium (ban) on the termination of a lease for non-payment of rent by the tenant;

  • The lease must go on - the tenant must otherwise continue to apply with the terms of the lease, subject to any rental payment amendments;

  • Proportionate rent relief - landlords must offer proportionate rent relief arrangements to tenants in financial distress;

  • Rent increases frozen - any rent increases are to be frozen (except for retail leases based on turnover rent) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period;

  • Landlord outgoings relief to be passed on - any reduction in the landlord’s statutory charges (such as land tax or council rates) or insurance must be passed on to the tenant in the appropriate proportion applicable under the lease. Similarly, any benefit that the landlord receives due to the deferral of loan repayments must also be shared with the tenant in a proportionate manner;

  • Restricted access to tenant’s security - landlord must not draw upon the tenant’s security (bank guarantee or deposits or personal guarantees) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period; and

  • Mediation - any disputes (including dispute on negotiations under the Code) are to be subject to a binding mediation process, based on the applicable state or territory retail/commercial leasing dispute resolution processes.


Rent Relief Application


Tenants are to be eligible for rent relief in the same proportion that the tenant’s business has experienced a reduction in revenue. For example, if there is a 60% loss in turnover to a tenant’s business (during the applicable period) from the COVID-19 crisis, the Code stipulates that it is to result in a 60% cash flow relief, from the landlord to the tenant (Relief).


The Relief is to be implemented and managed between rental payments waived and rental payments deferred. In the example above this would be as follows:


  • Of that 60% rent Relief, at least half of it must be provided by way of rent free or a rent waiver, and this amount may not be recouped by the landlord over the term of the lease; and

  • The balance of the 60% rent relief may be provided to the tenant by way of a deferral of rental payment due, to be amortised and recouped by the Landlord over the balance of the lease term or at least 24 months in a manner that is negotiated between the parties.


Please note, however, that at all times parties are free to come to their own commercial arrangements by agreement.


Given that the burden of the Code falls upon landlords, Australian and foreign banks, along with other financial institutions operating in Australia, are expected to support landlords and tenants with appropriate flexibility as they work to implement the mandatory Code.


Manner of Implementation - NSW

In NSW, the Code has been implemented by way of the introduction of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 under the Retail Leases Act 1994 (NSW) and the insertion of Schedule 5 to the Conveyancing (General) Regulation 2018 (NSW) (NSW Regulations).

The NSW Regulations now apply to a retail shop lease under the Retail Leases Act 1994 (NSW) or a commercial lease to which the Conveyancing Act 1919 (NSW) applies, provided that the tenant is an ‘impacted lessee’ (i.e. a tenant that qualifies for the JobKeeper scheme and whose turnover in the 2018–2019 financial year was less than $50 million), but does not apply to:

  • a new retail shop lease or commercial lease entered into after the commencement of the NSW Regulation (i.e. 24 April 2020); or

  • a lease under the Agricultural Tenancies Act 1990 (NSW).

The key provisions of the NSW Regulations are as follows:

  1. Landlords may not take a ‘prescribed action’ (e.g. an eviction, termination of the lease, exercising a right of re-entry, recovering a security bond, or requiring a payment of penalty interest) against an impacted lessee for failure to pay rent or outgoings, or if the tenant’s business operating under the lease is not open for business during the hours specified in the lease.

  2. The rent payable under the commercial lease (other than rent or a component of rent determined by reference to the tenant’s turnover) must not be increased.

  3. Any reduction in the landlord’s statutory charges (such as land tax or council rates) or insurance must be passed on to the tenant to the extent of the reduction.

  4. Any party to a lease impacted by the NSW Regulations may request the other parties to renegotiate the rent payable under, and other terms of, the commercial lease. If requested, the parties must renegotiate in good faith, having regard to the Code and the economic impacts of the COVID-19 pandemic.

  5. A landlord may not exercise or enforce any other usual rights of the landlord under the lease until undertaking mediation conducted by the Small Business Commissioner and obtaining a certification in writing that the mediation failed to resolve the dispute.

These provisions apply until 24 October 2020.

As a general reminder, landlords are still permitted to take a ‘prescribed action’ against a tenant on grounds unrelated to the economic impacts of the COVID-19 pandemic (e.g. a ‘prescribed action’ can still be taken if the tenant breaches the lease by damaging the premises).

The NSW Government is also offering a reduction in land tax payable by landlords who provide a rent reduction to a tenant who (i) has an annual turnover of up to $50 million and (ii) is experiencing financial distress due to the COVID-19 pandemic (i.e. for commercial tenants, where there is a reduction in turnover compared to a previous comparable period of at least 30%). If the landlord simply defers the rent, the land tax reduction will not be available.

The land tax reduction will be the lesser of:

  • the amount of rent reduction provided to a tenant for any period between 1 April 2020 and 30 September 2020; and

  • 25% of the land tax attributable to the parcel of land leased to that tenant.

For landlords who have not completed payment of land tax for 2020, the amount left payable will be adjusted in accordance with the tax relief (and any outstanding payments can be deferred for up to three months). For landlords who have already paid land tax for 2020, the reduction can be refunded.


Manner of Implementation - QLD


In Queensland, the COVID-19 Emergency Response Act 2020 (QLD) was passed on 22 April 2020. Section 23 creates regulation-making powers that reflect the Code, including prohibiting termination of a lease in certain circumstances, requiring parties to have regard to particular matters or leasing principles, and to provide for dispute resolution via mediation. Such regulations have not (as of 7th May 2020) yet been made.


However, in QLD, landlords can apply for a land tax rebate of 25% for the 2019-20 assessment year, provided that their tenant’s ability to pay normal rent is affected by the COVID-19 pandemic, they pass on the relief to tenants, and comply with the QLD government’s leasing principles.


QLD landlords can also apply for the land tax rebate if all or part of their property is available and marketed for lease, their ability to secure tenants has been affected by the COVID-19 pandemic, they require relief to meet financial obligations, and will comply with the QLD government’s leasing principles.


Manner of Implementation - Victoria

Victoria has now released the COVID-19 Omnibus (Emergency Measures)

(Commercial Leases and Licences) Regulations 2020 (Vic Regulation), which does not expressly implement or refer to the Code, but codifies comparable principles. The VIC Regulation operates retroactively from 29 March 2020 to 29 September 2020.

Leases affected by the Vic Regulation are retail leases under the Retail Leas­es Act 2003 (Vic) and non-retail commercial leases or licences in effect from 29 March 2020 under which:


  • the premises is used for the purpose of carrying on a business at that premises; and

  • the ten­ant is a SME enti­ty and qual­i­fies for or is par­tic­i­pat­ing in the Job­Keep­er scheme.


The Vic Reg­u­la­tion excludes leases and licenses in respect of premises used wholly or predominately for agri­cul­tur­al, grazing, or farming operations and do not apply to a ten­ant who is part of a relat­ed enti­ty with an aggre­gate turnover in excess of $50M.


Under the Vic Regulation, tenants will not be in breach of a lease for failure to pay rent and landlords may not evict or attempt to evict a tenant, re-enter a premises, have any recourse to any security relating the non-payment of rent, if the following steps are taken:

  • the tenant must make a written request to the landlord for rent relief. The statement must include information that evidences that the tenant is an SME entity and is a participant in the JobKeeper scheme;

  • within 14 days (or longer by agreement), the landlord must provide an offer for rent relief. The relief offered should take into account issues such as the reduction in the tenant’s turnover, any reduction in the outgoings charged, and the landlord’s capacity to offer relief. At least 50% of the rent relief offered by the landlord must be in the form of a waiver of rent, unless otherwise agreed in writing;

  • following receipt of the offer, the parties must negotiate the rent relief in good faith.

If an agreement is reached between the parties and the tenant seeks to vary the rent again, the process outlined above must be followed again.

If the parties are unable to reach an agreement, the dispute should be referred to the Small Business Commission for mediation.

While some of the requirements above are not prescriptive (e.g. which specific issues need to be considered when determining the landlord’s capacity to offer relief), there is an overarching requirement that the parties must cooperate and act reasonably and in good faith in all discussions and actions associated with matters to which the Vic Regulation applies.

Other key provisions of the Vic Regulation are as follows:

  • There is a prohibition on rent increases, unless the landlord and the tenant otherwise agree in writing.

  • If the parties agree to defer rent, the landlord must offer an extension of the term of the lease for the equivalent period of the rent deferral on the same terms and conditions as the lease (unless otherwise agreed), and must not charge any interest or fee in relation to any deferred payment.

  • If a tenant cannot operate their business at a premises, the landlord may cease to provide, or reduce the provision of any service as is reasonable in the circumstances and in accordance with any reasonable request of the tenant.

  • Landlords must proportionately pass on to the tenant any reduction in the landlord’s outgoings in respect of the premises;

  • The terms of any agreement between the landlord and tenant must remain confidential.

  • Landlords cannot take action against eligible tenants who reduce the opening hours of the business they carry out at the premises, or close the premises and cease to carry out any business at the premises.

As with NSW, a Victorian landlord may take action against a tenant on grounds unrelated to the economic impacts of the COVID-19 pandemic.

In Victoria, landlords who provide tenants impacted by coronavirus with rent relief may also be eligible for a 25% reduction on the property’s 2020 land tax. Such tenants must be eligible to receive the JobKeeper payment and be SME enterprises (with annual turnover up to $50m), and the parties must have agreed to reduce the rent by an amount that is at least 25% of the 2020 land tax for the relevant property. Landlords who are unable to secure a tenant because of the pandemic may also be eligible for the land tax reduction.

Further regulations and legislative responses will come to light in due course.


Next Steps


If you are a tenant: A tenant in financial distress (as defined in the Code), should contact their landlord as soon as possible to commence negotiations in good faith for rent relief. In order to avoid any potential breach of the lease, the discussions must be based on the principles outlined in the Code or the applicable State regulations. Tenants must also ensure that they comply with their obligations of good faith to honestly disclose financial statements evidencing revenue figures. Tenants should liaise with their accountants in this regard.


If you are a landlord: The Code is designed to be supportive of business, to facilitate cash management due to financial distress and to position for recovery. It implements significant arrangements favourable to tenants. So, it is important that landlords (including sub-lessors) reach out to their tenants (or sub tenants) to provide an outline of the general approach to the Code for the premises and to request information and evidence about a tenant’s eligibility for Relief under the Code. This could include monthly, year to date and prior year financial statements including balance sheets, profit and loss statements and statements of cash flows. It is also reasonable for a landlord or sub-lessor to request regular updates on the tenant’s (or sub-tenant’s) circumstances. Landlords, in order to assist with and to manage their cash flow concerns, should also reach out to their bank and keep the bank informed on the status of negotiations with tenants.


We also note that the implementation of the Code is subject to any further legislative changes during this unique time of crisis. We recommend that tenants and landlords engage in regular communications to resolve any rent issues in accordance with the principles of the Code and the regulations of the relevant jurisdiction.


Additional information and guidance on the Overarching Principles of the Code


Extracted below the key overarching principles as stated in the Code:


The objective of the Code is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords.


It is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis.


The following overarching principles of this Code will apply in guiding such arrangements:


  • 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 during a reasonable recovery period.

  • Landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes.

  • Landlords and tenants will negotiate in good faith.

  • Landlords and tenants will 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.

  • 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. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period.

  • 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 this Code.

  • All premises are different, as are their commercial arrangements; it is therefore not possible to form a collective industry position. All parties recognise the intended application, legal constraints and spirit of the Competition and Consumer Act 2010.

  • The Parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged 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.

  • Leases have different structures, different periods of tenure, and different mechanisms for determining rent. Leases may already be in arrears. Leases may already have expired and be in “hold-over.” These factors should also be taken into account in formulating any temporary arrangements in line with this Code.

  • As the objective of this Code is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership, and the application of the Code modified accordingly.


This page will be updated as further information is provided with respect to the implementation of the Code by various states and territories.


The principles outlined in this information sheet are for guidance only and specific responses and advice will vary depending on the particular facts of your circumstances. The content above is therefore general information only and should not be relied upon as legal advice.


If you have any questions about your current lease arrangements or if you are experiencing difficulties in negotiating the terms of a relief arrangement with the landlord or tenant of your premises, please contact Blueprint Law via our website or give us a call on +61 (2) 9300 3100.


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