COVID-19 National Code of Conduct for Commercial Leases

The eagerly awaited National Code of Conduct for commercial Landlords and Tenants affected by the COVID-19 Pandemic was announced by the Prime Minister yesterday.

This is a compulsory code of conduct and will be made legally enforceable by the State Government.

We answer some of the questions our clients have been raising below to assist Landlords to better understand the Code’s intended reach and impacts:

Q. Why introduce a mandatory code of conduct?

A. To ensure Landlords and Tenants agree on rent relief measures during the Pandemic.

Q. Who does it apply to?

A. All Landlords and Tenants who qualify for the Commonwealth Government’s JobKeeper program with an annual turnover of less than $50 million – NOTE: some Tenants who do not meet these criteria may still qualify.

Q. When does the code come into effect?

A. No date has been set and may be retrospective.

Q. How is the amount of rent relief determined?

A. (i) The amount of rent relief is to be in proportion to the reduction in the Tenant’s turnover;

(ii) At least 50% of the rent relief must be a waiver (ie rent free) with the balance of the rent relief amount to be deferred over either the remaining lease term or 24 months whichever is greater.

Example:

Monthly Rent - $10,000

Lease term remaining – 24 months

Fall in Tenant’s Turnover – 50%

Rent Relief applicable –

(i) Rent reduces to $5,000 per month;

(ii) 50% of the reduced rent is a waived – ie $2,500 per month rent free;

(iii) 50% of the reduced rent is deferred for 24 months – “deferred rent”;

(iv) Tenant pays $5,000 per month until the COVID-19 Pandemic is declared at an end by government;

(v) When the Pandemic is declared at an end the rent reverts to its normal level plus 1/24 of the “deferred rent”.

(vi) The code offers no guidance on how to treat the deferred rent where a lease has less than 24 months unexpired.

Q. What information do Parties have to provide?

A. Relevant and accurate information about revenue, expenses and profitability to show a reduction in turnover. NOTE: Landlords may be required to declare any assistance they have received – eg. loan deferments.

Q. Does the Code apply to payment of outgoings?

A. Landlords are required to:

(i) Reduce outgoings proportionate to the reduction in the Tenant’s turnover, and;

(ii) Waive outgoings during periods where a tenant is no longer able to trade.

Q. Does this code affect rent reviews?

A. There is a freeze on rent increases during the period when the code applies

Q. Do tenants have to keep trading to qualify for rent relief?

A. Tenants may stop trading or reduce operating hours without penalty.

Q. Can a Landlord access a Tenant’s Bank Guarantee or Security Deposit?

A. Landlords cannot draw on a bank guarantee, security deposit or personal guarantee while the COVID-19 Pandemic continues and for a reasonable recovery period afterwards.

Q. What happens if a Tenant breaches the Lease?

A. Tenants must comply with their leases (subject to the changes defined in the Code). Any breach results in the Tenant losing the protections afforded by the Code.

Fitzroys are here to assist you to navigate through this unprecedented event. Please contact our experienced professionals to discuss any aspects of the Code and its application to your specific circumstances.