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On 7 April 2020, the Prime Minister, Scott Morrison, provided details of the mandatory Commercial Tenancies Code of Conduct to be legislated and regulated in each state and territory.
Purpose of the Code
The purpose of the mandatory Code of Conduct for commercial leases (Code) is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between landlord and tenant and also some third party operators, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.
This Code applies to all tenants that are suffering financial stress or hardship as a result of the COVID-19 pandemic, as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million.
“Financial Stress or Hardship” is defined as “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 this Code.”
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 in respect of one retail outlet).
Effect and Duration
State and territory legislation or regulation as appropriate will give effect to the Code. The Code is not intended to supersede current legislation, but aims to complement it during the COVID-19 crisis period.
The Code is to come into effect from a date following 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 COVID-19 pandemic) to be defined by each state and territory, for the period during which the Commonwealth JobKeeper programme remains operational.
Terms of Temporary Arrangements
The Code requires that when negotiating and enacting appropriate temporary arrangements the following leasing principles should be applied as soon as practicable on a case-by-case basis:
A “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” is “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 Commonwealth’s JobKeeper programme”.
The overarching principles of the Code, which parties need to keep in mind when negotiating, are that landlord and tenants:
“Sufficient and accurate information 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.”
Code Administration Committees
The Code 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 promote awareness; encourage application of the Code; encourage its application by the broader retail industry and monitor the operation of the Code.
Where landlords and tenants cannot reach agreement on leasing variations and 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 or Ombudsmen where applicable.
Our real estate team can assist you, whether you are a landlord or tenant, with deciphering the Code, ascertaining whether it applies to your circumstances, negotiating arrangements with the other party, drafting relevant agreements/deeds, attending mediation and working with you through this crisis.