9 April 2020 – By Natasha Sanders
Yesterday the Federal Government released the National Cabinet Mandatory Code of Conduct (the “Code”), which provides some much needed clarification with respect to the obligations of landlords and tenants when negotiating temporary amendments to commercial tenancies as a result of the impact and commercial disruption caused by the economic impacts of industry and government responses to the declared Coronavirus (“COVID-19”) pandemic.
With so much competing information being published, we will seek to shed some light on our clients’ most frequently asked questions.
What is the National Cabinet Mandatory Code of Conduct?
The Code is a set of good faith leasing principles that have been released by the Federal Government to guide temporary amendment negotiations between landlords and tenants with respect to commercial tenancies during the COVID-19 pandemic period.
Do I need to follow the Code of Conduct?
The Code will come into effect in all states and territories from a date following 3 April 2020. While we are still waiting for the Queensland Government to enact legislation implementing the Code in Queensland, it is possible that the Queensland Government will apply the legislation retrospectively to 3 April 2020, meaning that any actions taken or negotiations conducted between landlords and tenants from 3 April 2020 onwards would be governed by the new legislation. It is therefore recommended that landlords and tenants adhere to the Code in all dealings.
Who does the Code of Conduct apply to?
The Code applies to all commercial tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic.
A tenant is considered to be suffering from financial stress and hardship when the tenant is unable to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) which causes the tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments.
Tenants which are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under the Code.
How should landlords and tenants approach negotiation?
Landlords and tenants are required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements and to work towards achieving mutually satisfactory outcomes, and the negotiations must be carried out in good faith.
Tenants have an obligation to provide their landlord with sufficient and accurate information during negotiations to work toward achieving mutually satisfactory outcomes (including information generated from an accounting system and/or from a financial institution).
Keep in mind that both parties are likely to be suffering financial hardship as a result of the COVID-19 pandemic and that the aim of these temporary arrangements is to reach an agreement that provides an outcome that is satisfactory to both parties whilst seeking to appropriately balance the interest of the tenant and the landlord.
What happens to the payment of rent?
There is no blanket requirement for a landlord to offer rent free periods to tenants during the COVID-19 period. More importantly, tenants should not arbitrarily request a rent waiver without providing sufficient and accurate financial information about their loss of turnover, as this would be contrary to their obligation to act in good faith and not be in the spirit of the Code, which is to share, in a proportionate manner, the financial risk and cashflow impact
When provided with suitable financial justification and/or evidence, landlords must reduce the tenant’s rent payable in proportion with the tenant’s reduction in trade during the COVID-19 pandemic period and a subsequent reasonable recovery period through a combination of waivers of rent and deferrals of rent.
Waivers of rent must account for at least than 50% of the total reduction in the rent and deferrals must be covered over a period of 24 months or the balance of the lease term, whichever is greater.
For example:
The monthly rent payable under a commercial lease is $10,000.00. The lease expires on 1 April 2021.
The tenant has experienced a 40% downturn in trade and has provided the landlord with evidence of their financial position.
The landlord agrees to provide the tenant with a 40% discount ($4,000.00) on their monthly payment of rent to be reviewed on a monthly basis.
Under the Code the landlord must waive at least50% of the discount, so the landlord will waive $2,000.00 per month. The remaining $2,000.00 per month will be paid back to the landlord once the COVID-19 pandemic has passed.
The COVID-19 pandemic period lasts for three months and it takes two months for the tenant to recover financially (5 months in total). The tenant now owes the landlord $10,000.00 in deferred rent ($2,000.00 x 5 months). This $10,000.00 will be repaid to the landlord in equal monthly installments over the next 24 months.
What if the landlord feels they are unable to waive 50% or more of the rent?
Regard must also be had to the Landlord’s financial ability to provide such waivers and the tenant may waive the requirement for a 50% minimum waiver by agreement.
What are the landlord’s rights against the tenant for non-payment of rent?
Landlords must not terminate the Lease for non-payment of rent and they must not draw on a tenant’s security due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
Nevertheless, tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code of Conduct. Any material failure by a tenant to abide by substantive terms of their lease will result in a forfeit of any protections provided to the tenant under the Code. This article mentions your favorite at super low prices. Choose from same-day delivery, drive-up delivery or order pickup.
What happens if the landlord and tenant are unable to reach an agreement?
If a landlord and tenant are unable to reach an agreement on temporary arrangements, these arrangements will be overseen by a binding mediation process run by the states and territories, including Small Business Commissioners/Champions/Ombudsmen where applicable.
What other obligations do the landlords have under the Code?
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance must be passed on to the tenant. Where appropriate, the landlord should seek to waive recovery of any other expenses or payment of outgoings from the tenant during any period that the tenant is unable to trade;
- Landlords should provide tenants with an opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period granted to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes. For example, if you waive/defer rental payments for three months during the lease term, you should provide tenants with the opportunity to extend their lease term for an additional three months;
- Landlords must freeze 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 or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
What obligations do the tenants have when negotiating commercial tenancies?
Tenants have an obligation to provide their landlord with sufficient and accurate information to work toward achieving mutually satisfactory outcomes including:
- BAS statements;
- information generated from an accounting system;
- information from a financial institution; and
- details of relief received from:
- their financial institution;
- the Government;
- utility providers; and
- the Australian Taxation Office.
Further, as mentioned above, Tenants must abide by the terms of their lease, subject to any temporary amendments negotiated with the Landlord under the Code. A failure to do so will result in the loss of any protections that the Tenant had under the Code.
Moving forward
Watch this space as we continue to update this page with the latest updates on this matter.
If you have any questions regarding the contents of this article, please do not hesitate to contact our office.