Commercial Leasing ‘Code of Conduct’

In response to the COVID-19 situation, the Government has announced the implementation of a mandatory code of conduct (“the Code”) regulating relations between commercial landlords and tenants whose business turnover may be affected by the current restrictions in place. This includes retail, office and industrial leases.

The premise of the Code is to impose ‘good faith’ obligations on both landlords and tenants to negotiate current leasing arrangements, with the aim being to aid cash flow proportionately between landlords and tenants so businesses can remain in operation during the pandemic period and thereafter, and preserve the relationship between the landlord and tenant.

The Code is mandatory and will be regulated by each state and territory upon rollout. It applies to those tenancies where the tenants and landlords are eligible and apply for the JobKeeper program, namely businesses who:

1. have a turnover of $50 million or less (including franchises at the franchisee level and retail corporate groups),
2. have lost, or will lose, more than 30% of their turnover as a result of COVID-19, and
3. are in financial distress.

In particular, the Code means that:

• landlords will not be able to terminate a lease on tenants who are unable to pay the regular amount of rent during the pandemic period, nor will a landlord be able to draw on any of the tenant’s security,
• landlords will be required to reduce the rent payable in proportion to their tenants reduced turnover during the pandemic period, either through a waiver or deferral of rent, or combination thereof,
• any waiver in rent will need to account for at least 50% of the reduction in rent payable,
• repayment of rent deferrals (i.e. payments that have been put off) will need to be spread across the greater of the remaining lease term or 24 months, and
• tenants must continue to honour the terms of the lease, or else risk forfeiting their rights under the lease.

While currently still being legislated, commercial landlords and tenants should consider whether the Code will be applicable to their situation during the next few months. Upon rollout of the legislation, we will be able to advise you further on your rights and responsibilities under the Code.