Government Announces details of COVID-19 mandatory commercial leasing Code
Over the last few weeks, landlords, tenants and their lawyers have been awaiting guidelines from the Government to assist in their lease negotiations. While further legislation is required from each of the States, the Prime Minister released the National Cabinet Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19 (Code) on 7 April 2020. A copy of the Code can be found here
The purpose of the Code is to “impose a set of good faith leasing principles for application to commercial tenancies” for existing leasing arrangements.
The Code applies where the tenant is an eligible business under the Government’s JobKeeper Program. To qualify for this program, the tenant must show they are suffering financial stress or hardship as a result of the COVID-19 pandemic. Further details about the JobKepper Program and its pre-requisites may be found here.
The Code will apply for the duration of the JobKeeper program, which commenced on 31 March 2020. There are various references to the Code applying for the duration of the COVID-19 pandemic plus a “reasonable recovery period”.
The Code includes extensive leasing principles to be applied on a case by case basis. Key principles include:
Landlords must not terminate leases for non-payment of rent during the COVID-19 pandemic period and any reasonable recovery period. Landlords are also prevented from drawing on any security deposit, bank guarantee or enforcing any personal guarantee during this period.
Tenants need to remain committed to the terms of their lease, subject to any negotiated amendments to their lease. If tenants do not do so, the benefits provided by the Code will be forfeited.
Landlords must offer their tenants a rent reduction proportionate to the percentage decrease in the tenant’s trade during the COVID-19 period. This must take the form of waivers and deferrals. The Code provides examples of how these may be calculated.
Once a reduced proportional rental is determined, the rental waiver must be not less than 50% of the total reduced proportional rent payable. If the tenant’s circumstances require, the reduction may be greater than 50%, but can also be less than 50% should the tenant waive this right. The Code states that the landlord’s financial position must also be considered when determining the amount of the waiver.
Where the parties agree that rent will be deferred, the deferral should be amortised. The period of amortisation is the balance of the lease or 24 months, whichever is the greater.
Landlords should waive recovery of outgoings during a period where the tenant is unable to trade. In other circumstances, where the landlord receives a reduction in outgoings such as decreased rates, land tax or insurance, a proportional reduction must be passed onto the tenant.
Any deferred loan repayments or benefit received by the landlord from its bank should be shared with the tenant.
Landlords cannot charge interest on extended repayment terms.
No rental increase can be applied during the duration of the COVID-19 pandemic and any subsequent recovery period. This would include CPI increases or fixed increases that occur on the anniversary of the commencement date of the lease. Turnover rental (where applicable) will still apply.
No penalty can be applied where a tenant opens for reduced trading hours or ceases to trade.
Where parties cannot agree, the matter will be referred to a binding mediation. The Victorian body has not been named at this time.
Further details will be provided once the Victorian legislation is announced.
If have any questions or require any assistance negotiating with your tenant or landlord, please contact:
Vittoria De Stefano
Principal Lawyer
T 03 5226 8520
M 0407 091 301
E vdestefano@ha.legal
