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The National Cabinet has published the mandatory Code of Conduct (Code) imposing various leasing principles to be applied by Landlords and Tenants during commercial lease negotiations in the midst of the COVID-19 pandemic.

The purpose of the Code is to preserve current tenancies and to mitigate the impact of COVID-19 on Landlords and Tenants during this difficult and uncertain time.

We anticipate that the Code will come into effect in each State and Territory shortly in order to implement a national approach to commercial leases.

who does the code apply to?

The Code applies to Tenants who conduct small-medium sized businesses and who are eligible for the Commonwealth Government’s JobKeeper programme (having an annual turnover of up to $50 million).

In terms of Franchises and Retail Corporate Groups, the $50 million annual turnover threshold will be applied as follows:

  • Franchises: at the franchisee level; and
  • Retail Corporate Groups: at the group level.

While the Code will not be mandated on Tenants who are not eligible for the Commonwealth Government’s JobKeeper programme, the National Cabinet encourage that the leasing principles below be applied to all leasing arrangements to encourage good faith negotiations and positive outcomes across all leases.

what are the leasing principles under the code?

The Code imposes the following leasing principles that should be applied by Landlords and Tenants:

  1. Landlords cannot terminate a Lease due to a Tenant’s non-payment of rent during the pandemic or subsequent recovery period;
  2. Tenants are required to continue to adhere to the terms of their Lease (subject to any agreed amendments with the Landlord). If a Tenant fails to do so, they risk forfeiting any protection provided to them under the Code;
  3. Landlords must offer Tenants a reduction in rent payable in the form of waivers and deferrals of up to 100% of the amount payable under the Lease. This will be applied on a case-by-case basis, but in any event, should be proportionate to the reduction of the Tenant’s trade.
  4. Rental waivers offered by Landlords must be no less than 50% of the total rent reductions payable under the principle above. This may be more if the Tenant is unable to fulfil their obligations under the Lease, however, regard must be had to the financial position of the Landlord.
  5. Rent deferrals must be amortised over the balance of the Lease term and over a period of no less than 24 months, whichever is greater.
  6. Any reductions in statutory charges (such as land tax and council rates) or insurance will be passed on to the Tenant in the appropriate proportion under the Lease terms;
  7. Landlords should seek to share with the Tenant (in a proportionate manner) any benefit received due to deferral of loan payments that have been offered to the Landlord from a financial institution.
  8. Landlords should waive recovery of any other amounts payable by the Tenant during the period the Tenant is not able to trade.
  9. If negotiated arrangements between the Landlord and Tenant under the Code necessitate repayment, such repayment should occur over an extended period of time to avoid undue financial burden on the Tenant. Accordingly, no repayment should commence until the earlier of the end of the COVID-19 pandemic (as defined by the Government), or the expiry of the existing Lease. At all times, a reasonable recovery period should be taken into account.
  10. No fees, interest or other charges are to be applied to any rent reduction, waiver or deferral.
  11. Landlords must not draw on a Tenant’s security (such as a cash bond, bank guarantee or personal guarantee) for the non-payment of rent during the COVID-19 pandemic period or a reasonable subsequent recovery period.
  12. Landlords should provide the Tenant the opportunity to extend their Lease for a period equivalent to the rent waiver and/or deferral period in order to provide the Tenant additional time to trade.
  13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) during the COVID-19 pandemic and a reasonable subsequent recovery period.
  14. Landlords may not apply any prohibition or levy any penalties on Tenants if they reduce opening hours or cease to trade during the COVID-19 pandemic period.

what if landlords and tenants cannot reach agreement?

If Landlords and Tenants are unable to reach agreement on temporary amendments to the terms of the Lease, the matter will be referred to the applicable State or Territory dispute resolution processes for binding mediation.

our advice

We recommend Landlords and Tenants seek to understand their obligations under the Code and continue to negotiate in good faith in order to preserve the relationship between the parties and obtain a mutually favourable outcome.

For any advice or assistance, please contact our Property team.

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Code of Conduct for negotiating commercial leases during COVID-19 released

09 April 2020
natalie zomaya

The National Cabinet has published the mandatory Code of Conduct (Code) imposing various leasing principles to be applied by Landlords and Tenants during commercial lease negotiations in the midst of the COVID-19 pandemic.

The purpose of the Code is to preserve current tenancies and to mitigate the impact of COVID-19 on Landlords and Tenants during this difficult and uncertain time.

We anticipate that the Code will come into effect in each State and Territory shortly in order to implement a national approach to commercial leases.

who does the code apply to?

The Code applies to Tenants who conduct small-medium sized businesses and who are eligible for the Commonwealth Government’s JobKeeper programme (having an annual turnover of up to $50 million).

In terms of Franchises and Retail Corporate Groups, the $50 million annual turnover threshold will be applied as follows:

  • Franchises: at the franchisee level; and
  • Retail Corporate Groups: at the group level.

While the Code will not be mandated on Tenants who are not eligible for the Commonwealth Government’s JobKeeper programme, the National Cabinet encourage that the leasing principles below be applied to all leasing arrangements to encourage good faith negotiations and positive outcomes across all leases.

what are the leasing principles under the code?

The Code imposes the following leasing principles that should be applied by Landlords and Tenants:

  1. Landlords cannot terminate a Lease due to a Tenant’s non-payment of rent during the pandemic or subsequent recovery period;
  2. Tenants are required to continue to adhere to the terms of their Lease (subject to any agreed amendments with the Landlord). If a Tenant fails to do so, they risk forfeiting any protection provided to them under the Code;
  3. Landlords must offer Tenants a reduction in rent payable in the form of waivers and deferrals of up to 100% of the amount payable under the Lease. This will be applied on a case-by-case basis, but in any event, should be proportionate to the reduction of the Tenant’s trade.
  4. Rental waivers offered by Landlords must be no less than 50% of the total rent reductions payable under the principle above. This may be more if the Tenant is unable to fulfil their obligations under the Lease, however, regard must be had to the financial position of the Landlord.
  5. Rent deferrals must be amortised over the balance of the Lease term and over a period of no less than 24 months, whichever is greater.
  6. Any reductions in statutory charges (such as land tax and council rates) or insurance will be passed on to the Tenant in the appropriate proportion under the Lease terms;
  7. Landlords should seek to share with the Tenant (in a proportionate manner) any benefit received due to deferral of loan payments that have been offered to the Landlord from a financial institution.
  8. Landlords should waive recovery of any other amounts payable by the Tenant during the period the Tenant is not able to trade.
  9. If negotiated arrangements between the Landlord and Tenant under the Code necessitate repayment, such repayment should occur over an extended period of time to avoid undue financial burden on the Tenant. Accordingly, no repayment should commence until the earlier of the end of the COVID-19 pandemic (as defined by the Government), or the expiry of the existing Lease. At all times, a reasonable recovery period should be taken into account.
  10. No fees, interest or other charges are to be applied to any rent reduction, waiver or deferral.
  11. Landlords must not draw on a Tenant’s security (such as a cash bond, bank guarantee or personal guarantee) for the non-payment of rent during the COVID-19 pandemic period or a reasonable subsequent recovery period.
  12. Landlords should provide the Tenant the opportunity to extend their Lease for a period equivalent to the rent waiver and/or deferral period in order to provide the Tenant additional time to trade.
  13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) during the COVID-19 pandemic and a reasonable subsequent recovery period.
  14. Landlords may not apply any prohibition or levy any penalties on Tenants if they reduce opening hours or cease to trade during the COVID-19 pandemic period.

what if landlords and tenants cannot reach agreement?

If Landlords and Tenants are unable to reach agreement on temporary amendments to the terms of the Lease, the matter will be referred to the applicable State or Territory dispute resolution processes for binding mediation.

our advice

We recommend Landlords and Tenants seek to understand their obligations under the Code and continue to negotiate in good faith in order to preserve the relationship between the parties and obtain a mutually favourable outcome.

For any advice or assistance, please contact our Property team.