Commercial Conduct Under New Code
The National Cabinet, which is made up of the Prime Minister and leaders from the various States and Territories, recently adopted a Code of Conduct for commercial tenants and landlords for the duration of the coronavirus pandemic and beyond. So, what do real estate professionals need to know? The REIQ provides an overview.
The purpose of the Federal Government’s Code of Conduct is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Federal Government’s JobKeeper program. These principles will apply to negotiating amendments in good faith to existing leasing arrangements – to aid the management of cashflow for SME tenants and landlords on a proportionate basis – as a result of the impact and commercial disruption caused by the economic impacts of industry and government responses to the declared coronavirus COVID-19 pandemic.
As highlighted, the Code of Conduct applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Federal Government’s JobKeeper program, with an annual turnover of up to $50 million. The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).
The parties to the Code of Conduct concur that during the COVID-19 pandemic period, as defined by the period during which the JobKeeper program is operational, the principles of the Code should nevertheless apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.
Parties to the Code
The Code of Conduct has been developed to enable both a consistent national approach and timely, efficient application given the rapid and severe commercial impact of official responses to the COVID-19 pandemic. Importantly, the Code will be given effect through relevant state and territory legislation or regulation as appropriate. The Code isn’t intended to supersede such legislation, but aims to complement it during the COVID-19 crisis period.
The objective of the Code of Conduct is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords. It’s intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis. The following overarching principles of this Code will apply in guiding such arrangements:
- Landlords and tenants share a common interest in working together, to ensure business continuity, and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during a reasonable recovery period;
- Landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes;
- Landlords and tenants will negotiate in good faith;
- Landlords and tenants will act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with the Code of Conduct;
- Any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses, and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period;
- The parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of the Code of Conduct;
- All premises are different, as are their commercial arrangements; it’s therefore not possible to form a collective industry position. All parties recognise the intended application, legal constraints and spirit of the Competition and Consumer Act 2010;
- The parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under the Code of Conduct;
- 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; and,
- Leases have different structures, different periods of tenure, and different mechanisms for determining rent. Leases may already be in arrears. Leases may already have expired and be in “hold-over.” These factors should also be taken into account in formulating any temporary arrangements in line with the Code of Conduct.
As the objective is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership, and the application of the Code of Conduct modified accordingly.
In negotiating and enacting appropriate temporary arrangements under the Code of Conduct, the following leasing principles should be applied as soon as practicable on a case-by-case basis:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).;
- Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code of conduct. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under the Code;
- Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under definitions below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period;
- Rental waivers must constitute no less than 50% of the total reduction in rent payable under point #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement;
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties;
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease;
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other landlords, with the tenant in a proportionate manner;
- Landlords should where appropriate seek to 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. Landlords reserve the right to reduce services as required in such circumstances;
- If negotiated arrangements under the Code of Conduct necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Federal Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period;
- No fees, interest or other charges should be applied with respect to rent waived in points #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in points #3, #4 and #5 above;
- 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;
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in point #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes;
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant; and,
- Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable. Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
The following definitions are provided for reference in the application of the Code of Conduct:
- Financial Stress or Hardship: 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 which are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under the Code.
- Sufficient and Accurate Information: This includes information generated from an accounting system, and information provided to and/or received from a financial institution, that impacts the timeliness of the parties making decisions with regard to the financial stress caused as a direct result of the COVID-19 event.
- Waiver and Deferral: Any reference to waiver and deferral may also be interpreted to include other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), or any other such commercial outcome of agreements reached between the parties. Any amount of reduction provided by a waiver may not be recouped by the landlord over the term of the lease.
- Proportionate: The amount of rent relief proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period, consistent with assessments undertaken for eligibility for the Federal Government’s JobKeeper.
Code Administration Committee
The Code of Conduct will be supported by state-based Industry Code Administration Committees, comprising representatives from relevant industry bodies representing landlord, tenant and SME interests, with an Independent Chair appointed by the relevant State/Territory Government. Committee members’ roles will be to (1) promote awareness of the Code; (2) encourage application of the Code; (3) encourage its application by the broader retail industry; and, (4) monitor the operation of the Code.
The Code of Conduct came into effect in all States and Territories from 3 April 2020 (being the date that National Cabinet agreed to a set of principles to guide the Code to govern commercial tenancies as affected by the COVID19 pandemic) to be defined by each jurisdiction, for the period during which the Federal Government’s JobKeeper program remains operational.
For more information on the Code of Conduct for commercial leasing, check out The REIQ’s fact sheet here for the essentials you need to know. Click here to download it now.