What you need to know about the Commercial Leasing Code of Conduct

We’ve summarised the key aspects of the new Commercial Leasing Code of Conduct relevant to Leasing Agents, Landlords and Tenants.

UPDATED: We’ve prepared an inforgraphic to simplify what the Code means for you:

commercial tenancy code of conduct.jpg



Snapshot

On Tuesday, the Prime Minister released the Commercial Leasing Code of Conduct (the Code). Some of the key aspects of the Code are:

  • The Code recognises that every lease is different, so obliges Landlords to negotiate tailored, bespoke temporary arrangements with each Tenant on a case-by-case basis.

  • The Code will be mandatory for Landlords and Tenants where a tenancy has suffered “financial stress or hardship as a result of COVID-19”.
    This primarily includes businesses with turnover of $50 million or less and that are eligible for the Government’s JobKeeper Program.

  • Landlords will be obliged to reduce and/or waive rent payments up to the value of the Tenant’s reduction in trade during the COVID-19 pandemic.

  • Both Landlords and Tenants will be obliged to otherwise honour the lease: Landlords will not be entitled to terminate a lease, and Tenants must comply with all other material terms of a lease.

  • Landlords must not draw on a Tenant’s security deposit for non-payment of rent.

  • Rent increases are generally prohibited during the pandemic.

We’ve covered the requirements of the Code and what it means for Leasing Agents, Landlords and Tenants below.

What’s it all about?

The Code’s overarching objective is “to share, in a proportionate, measured manner, the financial risk and cashflow impacts during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords”.

But what does the Code actually mean for Agents, Landlords and Tenants?

A key point of the Code that we’ve previously covered is that it relies on Landlords and Tenants negotiating temporary variations to leases in good faith.

The Code includes 14 Key Principles which should be applied when varying a commercial lease (see the full text of these principles here).

Some of the key aspects of the Code for Agents, Landlords and Tenants are detailed below and summarised in our infographic above.

Which tenancies are covered?

The Code will apply to tenancies 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 Program, with an annual turnover of up to $50 million”.

That is, the Code will automatically apply to businesses that have:

  • turnover of $50,000,000 or less; and

  • a reduction in turnover of at least 30% for a comparable period last year.

It is unclear from the text of the Code whether it will apply to businesses that are not eligible for the JobKeeper program, but are otherwise “suffering financial stress or hardship” as a result of COVID-19. Contact us if you fall into this category and need some further guidance.

Negotiate!

The Code recognises that no two leases are the same, and obliges Landlords to negotiate tailored, bespoke temporary arrangements with each Tenant on a case-by case basis.

It’s important to note that almost all requirements of the Code can be negotiated out of.

For the savvy Agent, Landlord and Tenant, it is our view that strict compliance with the Principles of the Code will be the exception, and bespoke agreements will be the norm.

Record it in writing

We’ve covered the importance of having an honest discussion and the importance of recording the agreed terms of any variation in writing — ideally with the help of a lawyer — to manage risk and ensure that the agreement is enforceable and accurately reflects the parties’ agreed position.

At District Consulting, we’re working with Commercial Leasing Agents, Landlords and Tenants to negotiate and formally record any lease variations. We’re also offering heavily discounted fees for businesses impacted by coronavirus.

Get in touch today for an obligation-free chat if you think we can help you.

Rent reductions and waivers

By default, the Code requires that Landlords waive and/or defer rent payments up to the proportion of the Tenant’s reduction in trade that has been caused by coronavirus.

Under the Code, Landlords must fully waive at least 50% of the reduction in rent that is applied.

Alternative measures can be negotiated between the parties, and Tenants can contract out of their right to the waiver or deferral (or the value of it).

Deferrals

Any rent payments that are deferred will be repayable in instalments over at least 24 months. The Code provides that all deferred rent payments must be amortised over:

  • the remainder of the lease; or

  • 24 months from the end of the pandemic,

whichever is longer. Again, parties can contract out of this requirement.

Rent increases prohibited

The Code prohibits rent increases (except for Retail lease rent increases based on turnover rent) during the pandemic.

Securing the security deposit

The Code also provides that Landlords must not draw on a Tenant’s security deposit for payment of rent during the coronavirus period.

Lease extensions

The Code encourages Landlords and Tenants to agree to an extension for an equivalent period of the rent reduction. This extension is intended to provide Tenants an opportunity to trade during the recovery period (post-coronavirus) on existing lease terms.

Honouring the lease

The Code also provides some obligations for Landlords and Tenants with respect to honouring the terms of the lease. In particular:

  • Landlords will not be entitled to terminate a lease for non-payment of rent.

  • Tenants must comply with all other material terms of a lease. Failure to do so will mean that the Tenant is deemed to have waived its other rights (including rent reduction and the moratorium on evictions) under the Code.

What next?

The Code will be introduced in legislation in every State and Territory.

Leasing Agents, Landlords and Tenants need to start negotiating in accordance with the Code. Care should be taken in negotiating any lease variations, and all variations should be formalised in writing with the help of a lawyer.

If you need help with a commercial lease, or would like to discuss the Code or the impacts of COVID-19 on your business, we’re always up for a chat. Contact us at District Consulting for an obligation-free discussion.

Disclaimer

The information presented in this article is general in nature and intended for readers in Victoria, Australia and is current at the date of publication. COVID-19 is an evolving situation. This information does not take into account your personal or business circumstances. Always seek specific, tailored professional advice to determine whether this information is appropriate for your circumstances.

Dan McQuinn