How the Leasing Code of Conduct will impact your lease April 8, 2020

In response to the COVID-19 crisis, the Commonwealth Government has unveiled its Leasing Code of Conduct for commercial tenancies

The National Cabinet has released a mandatory Leasing Code of Conduct for commercial tenancies. It will apply to most commercial tenancies (including retail, office and industrial).

What is the Leasing Code of Conduct?

The Leasing Code of Conduct (the Code) imposes a framework for the landlords and tenants to negotiate temporary measures. The aim is to share financial risk and the impact of cashflow issues during the COVID-19 crisis.

Although the purpose of the Code is well intentioned, it is apparent that the drafting of the Code has been rushed.  The Code is plagued by ‘loopholes’ that either landlord or tenant can use to their advantage.

Who is covered by the code?

The Code will be legislated and regulated throughout Australia on a State by State basis. Once enacted, the Code provides for various rent relief measures for tenants who satisfy the eligibility criteria for the JobKeeper payment programme.

What are the principles of the Code?

The Code requires parties to negotiate temporary rent relief measures (during, and for a period after the pandemic has ended) based on a number of leasing principles, including:

• A lease cannot be terminated for non-payment of rent
• Rent must be reduced through a combination of waivers and deferrals based on the reduction in the tenant’s trade:
  • The waivers must constitute at least 50% of the total reduction of rent
  • Deferrals must be amortised, interest free, over a period of at least 24 months

• A tenant’s security (bond, bank guarantee or personal guarantee) cannot be relied on for non-payment of rent
• A tenant can extend the lease for a period equal to the rent waiver and/or rent deferral period
• There can be no rent increases (other than turnover rent in retail leases) for the duration of the COVID-19 pandemic period and a reasonable recovery period after it passes

Importantly, the Code provides that a tenant will forfeit the protections afforded to it under the Code if it does not comply with the lease obligations.  Accordingly, tenants cannot simply use the pandemic as an excuse to ignore the covenants of the lease.

If the parties cannot negotiate an outcome, the parties must attend mediation with the Small Business Commissioner.

We can help

All landlords and tenants impacted by the Code now find themselves in unchartered territory.  However, the release of the Code will provide a framework for tenants and landlords to start talking.

If you are affected by the Code, it is imperative that you begin to take active steps to maximise your position, with the assistance of those who are following these new measures closely.

Find out more about leasing arrangements and the impact of COVID-19. Or to discuss your lease, contact us.

DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from marshalls+dent+wilmoth and other relevant experts.