MANDATORY CODE OF CONDUCT – SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19

On 8 April 2020, the National Cabinet finally released the long awaited Mandatory Code of Conduct in relation to Commercial Leasing (“Code”) which imposes a set of leasing principles to aid the negotiation between Landlords and Tenants to amend their existing leasing arrangement in response to the COVID-19 pandemic.

This mandatory Code is applied to all commercial tenancies, including retail, office and industrial. Tenants which are small-medium businesses suffering financial stress or hardship as a result of pandemic, may rely upon this Code to negotiate a rent waiver or deferral with the landlords. The businesses who are eligible for the JobKeeper Payment are automatically considered to be in financial distress for the purpose of this Code.

In a nutshell, the Code encourages the Landlord and the Tenant to share, in a proportionate, measured matter, the financial risk and cash flow impact of COVID-19, and negotiate in good faith, and in an open, honest and transparent manner.  The Landlord should bear in mind that the risk of default on commercial leases is ultimately and already borne by the Landlord.

In the negotiating temporary arrangements under the Code, the parties should follow the following principles, inter alia, during the COVID-19 period (which will commence shortly after 3 April 2020, subject to relevant legislations in each State and Territory, and end when the JobKeeper Payment arrangement ends) and a reasonable recover period thereafter:

1. The Landlords must offer tenants proportionate reductions in rent as waivers and deferrals of up to 100%. Rental waivers must constitute no less than 50% of the total reduction.

2. Payment of rental deferrals by the Tenant must be amortised over the balance of the lease term for a period of no less than 24 months.

3. The Landlords must not terminate leases for non-payment of rent.

4. The Landlords must not draw on a Tenant’s security bond or bank guarantee, or insist on rent increase.

5. The Tenants must stay committed to their lease terms (subject to amendments) and not in breach of the terms.

6. The Landlords must offer reductions in rent (as waivers or deferrals) based on the Tenant’s reduction in trade during COVID-19.

7. The Landlord will pass on benefits that they get for their properties (e.g. reduced charges, land tax, deferred loan repayments) should be passed on to the Tenant (in the appropriate proportion).

8. The Landlord should also waive the recovery of any other expense (or outgoing payable) by a Tenant, under lease terms, during the period the Tenant is not able to trade. The Landlord can reduce services as required in such circumstances.

If the parties cannot come to an agreement, the matter will be referred to applicable retail/commercial leasing dispute resolution process. In NSW, it is likely to be the Fair Trading NSW for mediation.

Please note that this Code is still to be adopted by each State by appropriate legislation. It remains to be seen how such legislation will work.

If you have any questions, or need any assistance in negotiation with your Landlord or Tenant, please contact us:

Chao Deng, Senior Associate, Accredited Business Law Specialist, cdeng@mtpartners.com.au

Disclaimer:  This article is intended to provide general information only, and is not to be regarded as legal advice. Formal legal advice should be sought in relation to particular transactions or circumstances.

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