Amid the COVID-19 pandemic, our government has announced a number of stimulus packages and measures to help our community get through this unprecedented time.
A mandatory code of conduct (the code) has been announced and makes up part of the hibernation strategy for our economy. It introduces several principles to commercial tenancies that are underpinned by good faith negotiations. If you’re a commercial tenant or landlord, here is what you need to know.
Who is eligible?
The principles outlined in the code are applicable for commercial landlord and tenant agreements, where the tenant is a business with an annual turnover of up to $50 million and is eligible for the JobKeeper program.
What are the leasing principles?
The principles under the code are not focused on outweighing benefits or making one party more disadvantaged than the other. It has been created to help share the burden and provide realistic options to sustain our businesses and ensure many are able to continue their current tenancies.
While emphasis is on tailoring arrangements to suit individual circumstances, the leasing principles provide a form of ground-rules for the discussions between commercial tenants and landlords.
Principle highlight: Rental reductions
Many commercial tenants are under immense financial distress due to the COVID-19 pandemic. Under the code, those eligible will receive rental reductions. This is how it will work:
- Landlords must offer proportionate rent reductions through waivers and deferrals, of up to 100 per cent of the ordinary rent payable
- Waivers must create no less than 50 per cent of the total reduction during the COVID-19 pandemic period
- Rental deferrals by the tenant must be paid over the balance of the lease term of no less than 24 months.
Tenants are equally responsible as landlords to exercise good faith in any negotiations.
For any tenant to remain protected under the code, they must remain committed to the terms of their lease, subject to any amendments. Any material failures to do so will result in the tenant losing any protections provided under the code.
The principles are designed to facilitate the good faith negotiations between landlords and their tenants and leverage any additional benefits that the landlord may obtain, such as deferrals of their own expenses.
Here are the key principles that a landlord must follow as part of the code:
- A landlord must not terminate leases due to non-payment of rent during the affected COVID-19 period
- Any reductions in statutory charges or insurance are to be passed on to the tenant through appropriate portions
- Landlords should seek to share any benefit of their own deferrals of loan repayments, provided by the Australian Bankers Association’s COVID-19 response
- Where appropriate, landlords should seek to waive recovery of any other expense by the tenant, during the period the tenant isn’t able to trade
- Landlords mustn’t draw on a tenant’s security for the non-payment of rent during the affected COVID-19 period
- Landlords must agree to freeze rent increases during the affected COVID-19 period.
How will this work?
The code will be implemented by state and territory governments via appropriate legislation and regulation.
Where a tenant and landlord cannot reach an agreement on leasing arrangements as a direct result of the COVID-19 pandemic, the matter would be referred to applicable resolution processes for binding mediation.
It’s important to note that good faith negotiations between commercial landlords and tenants is key for this to work. By coming to realistic and sustainable agreements, both parties will help each other reach the other side of this pandemic.