The federal government has announced the release of its mandatory code of conduct for commercial leasing principles, in order to protect the interests of both tenants and landlords navigating the economic downturn resulting from COVID-19.
Who does this apply to?
The National Cabinet has agreed that a tenant is an eligible business if it qualifies for the Commonwealth Government’s JobKeeper programme.
This will cover commercial tenancies covering retail, commercial and industrial leases.
General Principles
In general terms, here are the principles agreed:
- Landlords will be required to offer tenants proportionate rent waivers.
- This must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic.
- Tenants or landlords can negotiate higher than this 50 per cent mark, through further waivers or deferrals, based on the reduction in the tenants’ trade during the COVID-19 pandemic period and a subsequent recovery period.
- No fees, interest or other charges will be applied to any rent waived or deferred.
- Further information will be released next week, when the legislation is introduced to the Parliament.
- This will also include details of a mandatory, binding mediation process to be established, when landlords and tenants cannot reach agreement.
Leasing Principles
The leasing principles of the code are as follows:
Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this code.
Landlords must offer tenants proportionate reductions in rent payable (in the form of waivers and deferrals) of up to 100 per cent of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
Rental waivers must constitute no less than 50 per cent of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50 per cent minimum waiver by agreement.
Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other landlords, with the tenant in a proportionate manner.
Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
If negotiated arrangements under this code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above, and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
The code of conduct comes into effect immediately.
