COVID-19: Commercial Leasing Code of Conduct - Protect yourself. Know your options and rights

8 April 2020 by Simone Pentis

The Commercial Leasing Code of Conduct (“Code”) has now been released, to now be legislated and regulated in each State and Territory.

Overall, there is no one rule that applies to all and what you must now do is consider the relevant landlord and tenant situation individually, taking into account the below Code principals, then preparing your case and putting your best foot forward from the start to negotiate with parties in good faith on this basis.

Then upon reaching any agreement, this should be clearly set out in writing agreed by all parties (potentially a Deed of Variation may be required) so as to protect each party’s rights and avoid future disputes as to what parties had “understood” was the agreement reached.

This is extremely important for both landlords and tenants.

Below is a brief outline of various of the main points from the Code for your consideration:

First Consideration – Does the Code even apply to me? 

1.     The Code applies in respect to all Small to Medium Enterprises (SME) tenants (so commercial tenants only); and

2.     These tenancies must be:

• suffering financial stress or hardship as a result of the pandemic;

• as defined by their eligibility for the Commonwealth JobKeeper programme (i.e. 30% reduction in turnover as a result of COVID-19); and

• with an annual turnover of up to $50 million.

If the Code does not apply, the parties are free to negotiate as they determine.

Second Consideration – The Code applies, so now what?

Once you know if the Code applies, then you/your advisors must negotiate in good faith with the other party the relevant terms of relief to be provided in respect to existing

lease arrangements during the COVID-19 pandemic period, which will need to be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period.

For any negotiation there are obligations on both tenant and landlord (and consequently their representatives) in how they deal with each other and for any deal that they reach.

You can review the relevant Code in full via the below link  - https://www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf

Briefly some of the main principals and obligations include:

• both parties acting in good faith and in an open, honest and transparent manner;

• not terminating leases due to non-payment of rent;

• freezes on rent increases (except for retail leases based on turnover rent) 

• Landlords not drawing on tenant’s security bonds/bank guarantee or personal guarantee (as they relate to rental breaches);

• no penalties for a reduction in opening hours or cessation of trade;

• proportionate reduction in rent via waivers and deferrals. Any rental waivers to constitute no less than 50% of the total reduction in rent payable (unless parties agree otherwise);

• restrictions of when and how any agreed rental deferrals are to be repaid, and potential ability to extend lease term;

• Landlords passing on an appropriate proportion of any reduction in statutory charges (land tax, council rates) and should seek to not pass on outgoings, and may be consequently able to reduce their services;

• Tenants remaining committed to the terms of the lease (subject to negotiated amendments). Noting any material failure may forfeit protections otherwise provided under this Code; and

• Tenants being obliged to have regard for the landlord’s financial ability to provide additional waivers.

Where agreements cannot be reached between the relevant Tenant and the Landlord privately (with or without the assistance of your lawyer) then it should be referred to a dispute resolution process for mediation. 

NEXT STEPS: 

Again, the above is not exhaustive and each particular case (and the relevant lease documents) must be reviewed on a case by case basis.

We recommend you work out your strategy now, prepare relevant supporting information, then as relevant have you/your advisors negotiate directly with the other party, then formalise any agreement in writing.

Please contact us on admin@advpartners.com.au or call us direct on 0406 992 365 for guidance and assistance with reviewing your lease documentation, working out your strategy, assisting in negotiations and/or drafting relevant letters or documents to help you get the best deal in this situation and protect you going forward.

Please note that this Update is a general brief update, it does not purport to be comprehensive legal advice relevant to your circumstances. Consequently, specific legal advice for each of your circumstances should be obtained first before taking or not taking any action in respect to this area.