COVID-19 | Proposed Code of Conduct for Commercial and Retail Tenancies

The economic impact on both landlords and tenants during the COVID-19 pandemic continues to increase as stricter social distancing measures and restrictions on gatherings affect the ability of business to operate and trade from commercial and retail premises.

The National Cabinet met on 3 April 2020 to discuss the proposed Code of Conduct for Commercial and Retail Tenancies.  It is our understanding that the National Cabinet will meet again on 7 April 2020 with a view to finalising the proposed Code of Conduct which will be legislated by State and Territory Governments.

Which tenancies will the Code of Conduct apply to?

At this stage it is unclear whether the Code of Conduct will automatically apply, as announcements made by National Cabinet imply that tenants and landlords will need to sign up to the Code of Conduct.  However it does appear that the Code of Conduct may be mandatory for commercial and retail tenancies:

1. 1. experiencing a reduction in revenue by more than 30%; and
   2. with a turnover of less than $50 million.

Indications are the Code of Conduct will not apply to tenants whose business turnover has reduced by less than 30% as a result of COVID-19 or those businesses with a turnover of more than $50 million.

If the Code of Conduct applies, landlords and tenants will need to negotiate in good faith to ensure that they are acting in line with the principles of the Code of Conduct and come to an agreement regarding any rent relief.

What are the principles guiding the Code of Conduct?

The principles that guide the Code of Conduct are as follows:

1. 1. tenants should continue to pay rent to landlords where they can, and if the tenant experiences financial distress as a result of COVID-19, the tenant and landlord should negotiate on a mutually agreed outcome;
   2. rent reductions will be proportional, based on the decline in turnover to ensure that any burden is shared between tenants and landlords. It is not clear how tenants who have elected to close, rather than being required to by Government, will be treated.  It is also unclear whether those tenants who do not presently include online sales in their turnover information will be required to treat those online sales;
   3. prohibition on termination of leases for non-payment of rent (lockouts or evictions);
   4. freeze on rent increases (except for turnover rent);
   5. prohibition on penalties for tenants that stop trading or reduce opening hours;
   6. prohibition of landlords passing land tax onto tenants (if not already legislated);
   7. prohibition on landlords charging interest on unpaid rent;
   8. prohibition on landlords making a claim against a bank guarantee or security deposit for non-payment of rent;
   9. any benefits obtained by landlords are to be passed on to tenants; and
   10. legislative barriers and administrative hurdles to lease extensions will be removed (so that tenants and landlords can agree to a rent waiver in return for a lease extension).

Additional benefits for landlords and tenants?

The National Cabinet has indicated that State and Territory Governments may provide at least a three month land tax waiver and three month land tax deferral on application by landlords.  The benefits must be passed onto tenants by the landlords to ensure the benefit is being shared by both parties.

If the Code of Conduct applies, tenants will not be able to terminate leases on the grounds of financial distress, providing added protection for landlords during this uncertain time.

What if the parties do not come to an agreement?

If landlords and tenants are unable to reach a mutual agreement mediation will likely be provided as needed through existing State and Territory mechanisms.

Landlords and tenants should closely monitor developments of the Code of Conduct and continue to communicate and find mutually agreeable solutions for both parties dealing with the impacts of COVID-19.  Watch this space as there is more to come after 7 April 2020. In the meantime if you require any assistance please do not hesitate to contact our Property Team.

For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.

Authored by:

Archie Smith, Partner
Belinda Drivas, Senior Associate
Nakita Rose, Lawyer