9 April 2020
On Friday, 3 April 2020 our Prime Minister, Scott Morrison flagged the creation by the Federal Government of a mandatory code of conduct for landlords and tenants relating to commercial tenancies. The Code is designed to “have landlords and tenants in the room to make sure they can work the issues out between them, to have the arrangement to get through this period and get to the other side”.
Unlike other principles and regulations in our legal system which aim to strike a balance between what is fair, reasonable and just, the code is focused on economic survival. The Code is designed to ensure that at the end of the COVID-19 pandemic, Australia and Australians will have a viable economy.
The COVID-19 virus pandemic is forcing Australia into one of the toughest periods in its history. The Federal Government estimates the impact of the virus will last for at least six (6) months, but we predict that the overall impact of the virus on Australia’s economy may well be felt for as long as two years.
On Tuesday, 7 April 2020, the National Cabinet released the code called the NATIONAL CABINET MANDATORY CODE OF CONDUCT – SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19 (“Code”). The Code will be implemented by each of the Australian states and territories via legislation or regulation as considered appropriate.
Key aspects of the Code include
- “Good faith” to be the underlying principle under the Code.
- The Code will apply throughout the COVID-19 period, defined as the period during which the Commonwealth Government’s JobKeeper program remains operational (“Period”).
- The Code applies to all tenancies:
a. That are suffering from financial stress or hardship due to COVID-19. The financial stress or hardship of a tenant (an individual, business or company) is determined by the tenant’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic which causes the tenant to be unable to meet financial and/or contractual (including leasing) commitments. If a business is eligible for the government’s JobKeeper program, then the business is considered to be under “financial stress or hardship” within the meaning of the Code; and
b. With an annual turnover of up to $50 million. For franchises, the annual turnover threshold will apply the turnover of the franchisee not the franchisor.
4. The Code is not intended to replace landlords’ and tenants’ legal obligations under the laws of each state and territory but aims to complement them during the COVID-19 crisis period.
5. The Code is designed as a guideline for parties to commercial tenancies, to work together within the confines of the Code in a spirit of cooperation and in good faith, to reach a commercial arrangement intended to ensure the survival of all parties.
6. The Code imposes 14 principles, which landlords and tenants must abide by, including:
a. A freeze on annual rent increases.
b. Landlords not terminating leases due to non-payment of rent during the Period (or for a reasonable recovery period thereafter).
c. Tenants remaining committed to the terms of their lease (subject to any amendments agreed to/negotiated with their landlord under the Code).
d. Landlords offering tenants a reduction in rent which is proportionate to the reduction in the tenant’s trade during the covid-19 pandemic period and a subsequent reasonable recovery period. The rental reductions must be provided in the form of waivers and/or deferrals.
e. Landlords offering tenants a minimum 50% waiver of the reduced rental amount. The waivers can and should be more than 50% (they can be up to 100%), where failure to do so would compromise a tenant’s capacity to fulfil its ongoing obligations under the lease. However, a landlord’s ability to offer a waiver greater than 50% also needs to be considered. This would need to be determined on a case-by-case basis having regard to what is fair and reasonable for all parties.
f. The remaining amount of reduced rent that has not been waived, being deferred and paid out by the tenant over the balance of the term of the lease OR over a period of 24 months (whichever is greater), unless otherwise agreed between the parties. Deferral payments should not commence until after the COVID-19 pandemic is declared as being at an end by the Australian Government OR until the lease expires (whichever is sooner).
g. Any reductions in statutory charges (rates, land tax and the like) enjoyed by landlords must be passed on to tenants.
h. Any COVID-19 government benefits received by a landlord should be shared with its tenants proportionately.
To avoid any future uncertainty, Roberts Gray Lawyers recommends that any arrangements agreed upon pursuant to discussions under the Code, should be documented in writing.
If landlords and tenants are unable to reach agreement on leasing arrangements, the matter should be referred to appropriate dispute resolution processes such as mediation with the Small Business Commissioner or the Ombudsman.
The team at Roberts Gray Lawyers has always been committed to helping Australians through diversity, and this is especially so during the current COVID-19 crisis.
For assistance and expert advice on how the Code applies to you and any other matters relating to your commercial or retail tenancy during the COVID-19 pandemic period, please contact us.
Rhys Roberts, Senior Partner
Roberts Gray Lawyers