Tenancy ‘Code of Conduct’
Prime Minister Scott Morrison recently announced a mandatory Code of Conduct (Code), to be legislated by the States and Territories, which is designed to enable commercial tenants to survive the implications of the COVID-19 pandemic.
Emergency legislation has been passed in New South Wales and Tasmania allowing Regulations to be created to give effect to the six month moratorium on evictions.
At this stage, legislation has not been passed in Victoria. We expect that Victorian legislation won’t be far off.
The Code provisions remain for the period during which the JobKeeper subsidy remains in place.
The Code is to ‘impose a set of good faith leasing principles for application to commercial tenancies between landlords and tenants.”
- The tenant must be a small to medium sized business (with an annual turnover of up to $50 million) and be eligible for the JobKeeper subsidy.
- The Code applies to all SME tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic (as evidenced by their eligibility for the JobKeeper subsidy).
The concept of “financial stress or hardship” is defined in the Code as “an individual, business or company’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) that causes the Tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments.”
The principles that guide the Code include the following:
1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
2. Tenants must remain committed to the terms of their Lease, subject to any amendments to their rental agreement negotiated under this Code.
3. Landlords must offer Tenants proportionate reductions in rent payable in the form of waivers and deferrals based on the reduction in the Tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
4. Rent Waivers must constitute no less than 50% of the total reduction in rent payable over the COVID-19 pandemic period. Regard must also be had to the Landlord’s financial ability to provide such additional waivers.
5. Rent Deferrals must be covered over the balance of the lease term, with a minimum of 12 months (for example, three (3) years remaining on the lease means three (3) years to repay or six (6) months remaining on the lease means twelve (12) months to repay).
6. No fees, interest or other charges should be applied with respect to rent waived and no fees, charges nor punitive interest may be charged on deferrals.
7. The tenant should be provided with an opportunity to extend its lease for an equivalent of the rent waiver and/or deferral period. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
8. Landlords agree to a freeze on 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.
9. Any reduction in statutory charges (such as land tax or council rates) or insurance will be passed on to the tenant.
10. There will be a prohibition on penalties for tenants who stop trading or reduce opening hours.
11. Landlords must not draw on the tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
Banks, along with other financial institutions are expected to support landlords and tenants with flexibility as they implement the Code.
If you have any queries, please email: email@example.com.
This is a general summary only. For more information, please contact your Accountant.