COVID-19 – What is the Code of Conduct for commercial leases?
16 Apr 2020
- Business Law
As part of its response to the coronavirus pandemic the National Cabinet has announced the creation of a mandatory code of conduct with respect to commercial leases. Gene Schirripa explains what the code of conduct is, and how it may impact your commercial lease.
What is the Code of Conduct?
On 3 April 2019, the National Cabinet published a National Cabinet Mandatory Code of Conduct (Code of Conduct). However, to become effective the Code of Conduct needs to be legislated in each state and territory, as commercial leasing is a state and territory issue, rather than Federal one.
The Code creates a set of good faith leasing standards governing the relationships between landlords and tenants for the duration of the pandemic, and during the reasonable subsequent recovery period.
The key features of the 14 leasing principles established by the Code are:
- Proportionality principle – any reduction or waiver of rent should be commensurate with reduction in turnover
- Rent relief can take a number of forms, including rent reduction or waiver, deferral of rent (for not less than 24 months), pausing the lease or another commercial agreement reached between the parties
- Prohibition of termination of leases for non-payment of rent
- Prohibition on landlords charging interest for unpaid rent, or drawing on security provided by the tenant under the lease
- No rent relief entitlement in circumstances where there has been no reduction in business turnover.
- Binding mediation if the parties cannot agree.
A complete copy of the Code of Conduct published by the National Cabinet can be found here.
Who will the Code apply to?
The Code of Conduct will only apply to those commercial leases where the tenant satisfies the following eligibility requirements:
- Has signed up, and is therefore eligible for, the JobKeeper Program
- Has an annual turnover of $50 million or less.
Tenants need to ensure that they remain committed to the terms of their lease, subject to any variations agreed with their landlord under the Code. If a tenant does not continue to comply with the lease, then they will lose the protection of the Code of Conduct.
Tenants will also need to be transparent with landlords if they are to seek rent abatement. That is, if a tenant is claiming a 30% reduction in turnover, the Code requires ‘sufficient and accurate information’ to be provided to verify this.
How does the Code apply in the ACT?
On 8 April 2018, the Leases (Commercial and Retail) Act 2001– the Act governing commercial leases in the ACT – was amended to insert a new schedule 1 concerning the COVID-19 emergency response, allowing the minister to make a declaration in relation to a number of issues consistent with the Code of Conduct.
As at the date of publication, the minister is yet to make a declaration to implement the Code in the ACT in detail.
Will it be successful?
The full extent of the package is yet to be seen – including whether state and territory legislation will include sanctions for non-compliance. The Code endeavors to strike a balance between easing the pressure on tenants in difficult times for trading whilst ensuring they continue to meet obligations to landlords to the greatest extent possible.
The core tenet is good faith – that is, in difficult times, parties are mandated to negotiate in good faith to reach mutually agreed outcomes. The current situation requires understanding and co-operation on both sides. The government has left it to landlords and tenants to negotiate in these difficult times but has provided direction and guidance to ensure this occurs.
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