Mandatory Code of Conduct on Commercial Leasing

The Australian Government on 7 April 2020 released a mandatory code of conduct (Code) which has been deemed to take effect from 3 April 2020 requiring commercial rents to be reduced by the same proportion that the tenant’s revenue has fallen for the period during which the Commonwealth JobKeeper program remains operational.

State Parliament will give effect to the Code by enacting retail leasing provisions. It will operate to override any express provisions which conflict with the Code as contained in a lease. The Code is likely to be afforded similar protections that the Retail Leases Act 2003 (Vic) (Act) attracts by operation of section 94. Section 94 of the Act invalidates any provision contained in a lease which is inconsistent with the Act.

The Code applies to all commercial tenancies for tenants who qualify for the Commonwealth JobKeeper program with an annual turnover of less than $50 million.

Mandatory Principles

Fourteen leasing principles are given effect to under the Code, they are summarised as follows:

  1. Landlord’s must not terminate leases for non-payment of rent during the COVID-19 pandemic period and any reasonable subsequent recovery period (Concession Period).
  2. Subject to the Code concessions, tenants must otherwise comply with the terms of the lease otherwise protection under the Code will no longer apply.
  3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% (depending on the tenant’s reduction in revenue percentage) of the amount ordinarily payable.
  4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle 3 above. Regard must be had also to the Landlord’s financial ability to provide such additional waivers. The example further on demonstrates how Principle 3 and 4 works as a combination.
  5. Payment of the deferred rent applies over the greater of the balance of the lease term or for a period of no less than 24 months, unless otherwise mutually agreed.
  6. Any reduction in statutory charges such as council rates, land tax (note however under the Acta landlord is prevented from charging land tax if the Act applies) or insurance which has been received as a benefit to the landlord, that are otherwise recoverable against the tenant under the terms of the lease must also be passed on in the exact same proportion.
  7. A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution with the tenant in a proportionate manner.
  8. Landlords should where appropriate seek to waive recovery of any other expense or outgoing payable by a tenant during any period that the tenant is not able to trade.
  9. Repayments of deferred rent and if applicable outgoings are not to commence until the earlier of the COVID-19 pandemic ending or the existing lease expiring, considering a reasonable recovery period.
  10. No interest, fees or other charges are to be applied to any waived or deferred rent. 
  11. Landlords can not cash in any security deposit or bank guarantee due to non-payment of rent during the Concession Period.
  12. Leases are to be extended, if requested by the tenant for an equivalent period in which the rent waiver and/or deferral period has applied for.
  13. No rental increases apply during the Concession Period.
  14. No penalties can apply if the tenant reduces trading hours, irrespective of the provisions of the lease.

If the landlord and tenant can’t agree on the application of the above principles, then either party can apply to the Victorian Small Business Commissioner for compulsory mediation. We presume that for tenancies in which the Act applies Part 10 will apply which deals with dispute resolution.

Application

If a tenant qualifies for the Commonwealth JobKeeper program and suffers a 60% reduction in turnover then at a minimum half of that percentage, 30% will qualify as rent free by operation of Principle 4 and the other half, being the remaining 30% of the rent would be repaid over a minimum period of 24 months (Principle 5), repayments commencing after the Concession Period ends, unless the parties alter this arrangement by mutual agreement.

More information on the National Cabinet Mandatory Code of Conduct can be found here.

Please be advised that this Article has been produced for informative purposes only and based upon our interpretation of the Code and we do not recommend that anyone relies on the information contained in this publication without first receiving independent legal advice.

 

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