National Cabinet Mandatory Leasing Code of Conduct

Commercial Real Estate and Projects

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DATE PUBLISHED: April 8, 2020

The Prime Minister’s office this week published the commercial leasing principles to apply to landlords and tenants suffering financial distress or hardship as a result of the COVID-19 outbreak. These principles form a mandatory code of conduct (Code) as agreed by the National Cabinet, which will be adopted in coming days or weeks into State and Territory law.


WHO DOES THE CODE APPLY TO?

The Code applies to all commercial tenancies (including retail, office and industrial) that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million (“SME tenants” under the Code).


WHAT IS FINANCIAL STRESS OR HARDSHIP?

The Code defines this to be “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. SME tenants who are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under this Code”.


HOW LONG DOES THE CODE APPLY FOR?

The Code will apply during COVID-19 pandemic period, which is defined in the Code to be the period during which the Commonwealth Government’s JobKeeper programme is operational plus any subsequent recovery period.


NEGOTIATION PRINCIPLES TO BE FOLLOWED BY LANDLORDS AND TENANT UNDER THE CODE

The key principles binding landlords and tenants in negotiations under the Code include:

  1. Landlords and tenants will negotiate in good faith.
  2. The Parties will assist each other in their respective dealings with other stakeholders, including governments, utility companies, and banks/other financial institutions, to achieve outcomes consistent with the objectives of the Code.
  3. All leases must be dealt with on a case-by-case basis, considering factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic; whether the tenant’s lease has expired or is soon to expire; and whether the tenant is in administration or receivership.


LEASING PRINCIPLES TO BE FOLLOWED BY LANDLORDS AND TENANT UNDER THE CODE

The key principles binding landlords and tenants regarding specific lease obligations under the Code include:

  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 comply with the terms of the lease, subject to any amendments to their rental agreement negotiated under the Code.
  3. Landlords must offer tenants proportionate reductions in rent payable in the form of:
    1. Rent waivers – which must equal not less than 50% of a tenant’s reduction in trade for the COVID-19 pandemic period and which must not be recouped by the landlord over the term of the lease; and
    2. Rent deferrals - which may be amortised over the greater of the balance of the lease term and 24 months after the end of the COVID-19 pandemic period. No punitive interest may be charged on repayment of rent deferrals.
  4. Landlords should waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade (but landlords may reduce services if this occurs). The States and Territories have discussed granting certain landlords an exemption or deferral to the payment of land tax for three months.
  5. No repayment of a rent deferral should commence until the earlier of the COVID-19 pandemic ending or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
  6. Rent increases (excluding retail turnover rent) are to be frozen during the COVID-19 pandemic period.
  7. Tenants should be given lease extensions equal to the rent waiver or deferral period to allow the tenant time to trade during the recovery period.
  8. No prohibition or penalties apply to the reduction of operating hours or cessation of trade by a tenant.
  9. Landlords must not draw on a 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.


WHAT IF THE PARTIES CANNOT AGREE?

The Code requires a mandatory mediation process be undertaken by the landlord and the tenant (to be administered by each State and Territory) if they cannot reach an agreement regarding lease variations during the COVID-19 pandemic period.


HOW CAN WE HELP?

Any agreement reached between landlords and tenants under the Code (whether by mediation or negotiation) will need to be documented in writing by a variation to the lease. It is also important that any financier of the landlord or the tenant be included in the negotiation process so that an outcome can be achieved that is acceptable to all parties.

We are well placed to assist landlords and tenants in the negotiation of the terms of these lease variations in compliance with the Code and to prepare the required documentation to ensure the parties’ rights are protected.

PLEASE CONTACT US TO DISCUSS STARTING THE PROCESS. 

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