COVID-19 Update: SME Commercial Leasing Code of Conduct

The National Cabinet agreed to implement a mandatory Code of Conduct on commercial leasing (Code), details of which were revealed on 7 April 2020. The Code imposes a list of good faith leasing principles to existing leasing arrangements across Australia, in response to the economic impacts caused by the COVID-19 pandemic. The Code will be given effect through relevant State and Territory legislation or regulations (as appropriate) and will apply to retail, office and industrial leases.

Who does the Code apply to?

The Code applies to all tenancies that are suffering financial distress or hardship, as defined by their eligibility for the Commonwealth JobKeeper payments and with an annual turnover of up to $50 million.

Principles of the Code should apply in spirit to all commercial leasing arrangements for businesses affected by the COVID-19 pandemic, having fair regard to the size and financial structure of those businesses.

Definition of “financial distress or hardship”

Financial distress or hardship refers to an individual, business or company’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) that causes the tenant to be unable to meet its financial and/or contractual commitments. SME tenants which are eligible for the Commonwealth Government’s JobKeeper payments with an annual turnover of up to $50 million are automatically considered to be in financial distress under the Code.

Effective period of the Code

The Code is to be effective on a date to be defined by each jurisdiction which will be after 3 April 2020, for the period during which the Commonwealth Government’s JobKeeper program remains operational (i.e. the COVID-19 pandemic period).

Core principles of the Code

The core principles of the Code are generally summarised below. They should apply on a case-by-case basis during the COVID-19 pandemic period and, if appropriate, may also extend to a reasonable subsequent recovery period.

  • The parties are to negotiate in good faith to achieve tailored and appropriate temporary leasing arrangements. If the parties cannot reach agreement, the matter will be referred and subjected to applicable dispute resolution for binding mediation.
  • The financial risks and cashflow impacts during the COVID-19 pandemic period are to be shared in a proportionate manner between the parties.
  • Landlords must not terminate the lease nor draw on the tenants’ securities due to non-payment of rent.
  • Landlords must offer tenants appropriate reductions in rent in the form of waivers and deferrals (including hibernating or pausing of leases). Rental waivers must constitute no less than 50% of the total reduction unless this requirement is waived by the tenants. Rental deferrals must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is greater, unless otherwise agreed between the parties. Interest, fees or charges must not apply to the amount waived or deferred.
  • Opportunity to extend the leases for an equivalent period of the rental waiver and deferral period should be offered to the tenants.
  • Rental increases (except for retail leases based on turnover rent) will not apply.
  • During the period the tenants are unable to trade, recovery of outgoings or other expenses is waived and the landlords may reduce their services in such circumstances. Tenants cannot be penalised for reducing opening hours or ceasing to trade.
  • If negotiated arrangements include repayment of deferred rent, then instalments should be made over an extended period and not commence until the earlier of the ending of the COVID-19 pandemic period or the existing lease expiring.
  • Tenants are expected to honour their obligations under their leases (subject obviously to the provisions of the Code). Material failure to abide by substantive terms of the leases by the tenants will forfeit any protections offered to the tenants under the Code.

Next steps

The Code is general and based on the parties acting in good faith. As at the time of publication of this article, it remains unclear how the Code will be enforced in each jurisdiction, in particular in relation to office and industrial leases. We anticipate there will be additional information on application of the Code in each State and Territory in due course. Mutual dependence of tenants and landlords during this COVID-19 pandemic period should however drive the parties to reach mutual beneficial leasing arrangements as soon as possible.

Once the Code is applied through relevant legislation and regulations, tenants claiming the relief will be expected to prove to the landlords’ satisfaction that the relief claimed is proportionate to the tenants’ decline in turnover. While landlords must act reasonably during the negotiation process, tenants must act in an open and transparent manner and provide as much supporting information as possible to the landlords. At a minimum, landlords should request documents evidencing that the tenants are eligible for the JobKeeper program.

During negotiation, apart from considering the relief measures set out in the Code, landlords may also consider, for example, whether the existing incentive can or should still apply.

Once an agreement is reached, both parties should set out the arrangement in a proper written and, where appropriate, registrable document. Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable State or Territory bodies to be determined for binding mediation. Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.

For further information, please contact the Property + Projects Team.

Mike Ellis: mike.ellis@vincentyoung.com.au
Yanlie Leung: yanlie.leung@vincentyoung.com.au