Since our last article the National Cabinet has met several times to discuss the impact of COVID-19 on commercial and retail Landlords and Tenants noting that a significant number of businesses have closed due to Government regulations and the COVID-19 pandemic.
Code of Conduct
The National Cabinet have developed a Mandatory Code of Conduct which sets out good faith leasing principles for Landlords and Tenants. This Code is to be given effect through the relevant state and territory legislation. At this stage we are still waiting on the Victorian Government to pass legislation to give effect to the Code.
Application of the Code
The Code applies to all commercial, retail and industrial leases where the Tenant is eligible for the JobKeeper program with an annual turnover of up to $50 million.
The Code sets out principles for landlords and tenants to apply. The principles are summarised as follows:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 crisis.
- If Tenants fail to comply with the terms of their lease (other than those re-negotiated with the Landlord such as rent reductions/abatements and the right to reduce trading hours as noted below) then the Tenant will lose the protections under the Code.
- Landlords must offer reductions in rent in the form of waivers and deferrals proportionate to the reduction in the Tenant’s trade. Note that waivers cannot be recouped later by the Landlord whereas a deferral of rent can be recovered at a later stage.
- Rent waivers must constitute no less than 50% of the total reduction in rent payable and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise a tenant’s capacity to fulfil their ongoing obligations under the lease agreement.
- Rent deferrals must be amortised over the remaining lease term and for a period of no less than 24 months, whichever is greater.
- If the Landlord receives a reduction in statutory charges such as land tax and council rates or insurance, then those reductions are to be passed on to the Tenant in the relevant proportion payable by the Tenant pursuant to the Lease.
- The Landlord should share any benefit it receives due to deferral of loan payments in a proportionate manner.
- Landlords should waive recovery of other expenses (such as services) where the Tenant is not able to trade.
- Any negotiated repayment arrangements entered into between the Landlord and Tenant should occur over an extended period so it does not place an undue financial burden on the Tenant with no repayments commencing until the earlier of the COVID-19 pandemic ending (as defined by the Government) or the existing lease expiry.
- The Landlord should not impose any fees or interest for waiving or deferring rent.
- Landlords must not draw on any security deposits for non-payment of rent during the COVID-19 pandemic and/or reasonable subsequent recovery period.
- The Tenant should be given an opportunity to extend its lease equivalent to the rent waiver or deferral period, so it provides them with additional time to trade after the COVID-19 pandemic concludes.
- Landlords freeze rent increases for the duration of the COVID-19 pandemic and for a reasonable amount of time during the recovery period.
- Landlords cannot apply any penalties if a Tenant reduces opening hours or ceases to trade due to the COVID-19 pandemic.
If Landlords and Tenants are unable to reach agreement on their leasing arrangements, the Code provides that the dispute should be referred to mediation which in Victoria would be conducted by the Office of the Small Business Commission.
What to do
Until the Code is legislated in Victoria, Landlords and Tenants should continue to follow the advice set out in our previous article. Tenants should also start making enquiries as to whether they are eligible for the JobKeeper program.
In the meantime, we will endeavour to keep you informed of any proposed legislation and Government announcements.