National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19
On 7 April 2020, the National Cabinet released its Mandatory Code of Conduct (Code) to assist commercial landlords and tenants manage existing leasing arrangements in response to the commercial disruption caused by the Coronavirus Pandemic.
The Code applies where a tenant is eligible for the Federal Government’s JobKeeper programme and has a turnover of less than $50 million (calculated at the group level for retail corporate groups, and at the franchisee level for franchises).
The stated goal of the Code’s leasing principles is to guide landlords and tenants to negotiate temporary arrangements appropriate to their unique commercial circumstances.
The Code outlines 14 leasing principles which are to be applied between landlords and tenants on a case by case basis during the pandemic period and reasonable recovery period. An abbreviated summary of some of the leasing principles include:
- Landlords must not terminate leases due to non-payment of rent.
- Landlords must not draw on a tenant’s security (for example, bond or bank guarantee) for non-payment of rent.
- Landlords must offer tenants reductions in rent based on the reduction in the tenant’s trade.
- At least 50% a rental reduction must be a rental waiver (unless otherwise agreed with the tenant).
- Rental increases (except for retail leases based on turnover rent) are to be frozen.
Where landlords and tenants cannot reach an agreement, the matter should be referred to mediation.
NSW Government response
The NSW government has made the following regulations concerning retail and commercial leases entered prior to 24 April 2020:
- Retail and Other Commercial Leases (COVID-19) Regulation 2020.
- Commercial leases–COVID-19 pandemic special provisions, contained in schedule 5 of Conveyancing (General) Regulation 2018
A commercial or retail tenant who is eligible for the JobKeeper programme and had a turnover less than $50 million in the 2018-2019 financial year meets the criteria of an impacted lessee and is afforded certain protections by the regulations.
During the prescribed period, being from 24 April 2020 to 24 October 2020, a landlord cannot take any ‘prescribed action’ against an impacted lessee for its failure to pay rent or outgoings, or for failing to operate during the hours specified in the lease.
Some of the actions from which a landlord is prohibited during this period, except with the agreement of the impacted lessee, during the prescribed period include:
- Eviction of the lessee from the premises.
- Distraining of the tenant’s goods.
- Termination of the lease.
- Recovery of a security bond, or enforcing a guarantee under the lease.
- Requiring the payment of interest or fee on unpaid rent.
- Seeking damages.
Additionally, during this period:
- The rent payable by an impacted lessee cannot be increased (turnover rent excepted);
- Where a lease fixes an amount of outgoings payable by an impacted lessee, the lessee will not be required to pay the full amount of any amount of outgoings in respect of land tax, council rates, or any other statutory charge or insurance to the extent that the lessor has obtained a reduction in these amounts;
Obligation to renegotiate rent payable and lease terms
An impacted lessee, or a lessor, may request the other party to renegotiate the rent and other terms of the lease. Upon request, the other party to the lease must negotiate in good faith and having regard to the leasing principles outlined in the Code, and the economic impact of the pandemic.
In the case of a retail lease, a dispute involving an impacted lessee will be dealt with as if it were a retail tenancy dispute under Part 8 of the Retail Leases Act 1994. Accordingly, mediation must be attempted before proceedings are commenced by either party as per Part 8 of the Act.
In the case of a commercial lease dispute, and irrespective of whether a lessee is an impacted lessee, mediation must be attempted before a lessor commences proceedings seeking:
- To recover possession of the premises.
- To terminate a commercial lease.
- To exercise or enforce any other rights of the under the lease.
Where a dispute cannot settle in respect of these matters, the regulations provide that a Court is to have regard to the leasing principles in the Code of Conduct.
Get in contact with us to discuss any legal query you may have in respect of your commercial or retail lease.