COVID 19 Mandatory Code of Conduct for Retail & Commercial Leases

On 7 April 2020, the National Cabinet implemented a Mandatory Commercial Leasing Code of Conduct (“the Code of Conduct”) to operate during the COVID19 pandemic.

 On 24 April 2020 the Code of Conduct was given legislative force within New South Wales by a new Regulation to the Retail Leases Act 1994 being the Retail and Other Commercial Leases (COVID-19) Regulation 2020 and by an amendment to the Conveyancing (General) Regulation 2018. The Code of Conduct is in place for six months from when the Regulation commenced (“the Prescribed Period”).

 Now that businesses have or are soon reopening, the implications of the Code of Conduct for Landlords and Tenants is pertinent.

 The principles of the Code of Conduct are set out below:

Who does the Code of Conduct apply to?

The Code of Conduct applies to Landlords and Tenants where:

(a)     the Tenant is an enterprise with a turnover less than $50 million in the financial year 2018-2019; and

(b)     the Tenant qualifies for the Jobseeker Scheme. A Tenant who meets the above criteria is considered an “Impacted Lessee” under the legislation.

The Code of Conduct applies to Retail and Commercial Leases including offices and industrial premises.

What are the Landlord’s obligations if their Tenant is considered an ‘Impacted Lessee’?

If a Tenant meets the criteria of being an Impacted Lessee and fails to:
(a) pay rent and/or outgoings
(b)  keep the business operating during the usual hours specified in the lease,

the Landlord is prohibited from:
(a) re-entering into possession of the premises;
(b) claiming damages;
(c)  applying any rental increases otherwise due under the Lease;
(d) charging interest or fees in relation to unpaid rent (such as legal costs as required under many commercial and retail leases);
(e) drawing on the security bond;
(f)  terminating the Lease.

 The Landlord must also pass on to the Tenant any reductions in Land Tax, statutory charges such as Council rates and insurances, in the proportion of the reduction received by the Landlord, in the event that the Tenant is required to pay those outgoings under the Lease.

What are a Tenant's obligations if they are an “Impacted Lessee”?

 Clause 7 of the Retail and Other Leases COVID19 Regulation 2020 provides that the Tenant (or the Landlord) may request the other party to renegotiate the rent payable under the Lease. The parties are required to negotiate in good faith and have regards to the economic impacts of the COVID19 pandemic on the Impacted Lessee together with the principles set out in the National Code of Conduct.

The National Code of Conduct

 Under the Code of Conduct, when negotiating a temporary arrangement during the Prescribed Period, the following principles should be applied on a case-by-case basis:

1. Landlords must not terminate a Lease due to non-payment of rent;

2. Tenants must remain committed to fulfilling the terms of their Lease;

3. Landlords must offer Tenants a reduction in rent proportionate to the reduction in the Tenant’s trade during the COVID19 pandemic and any recovery period.   The reduction in rent can be in the form of waivers and deferments of up to 100% of the amount ordinarily payable under the Lease, assessed on a case-by-case basis.

4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under Principle 3 but waivers must also have regard to the Landlord's financial ability to provide such waiver and Tenants may waive the requirement for a 50% minimum waiver by agreement.

5. Payments of rental deferments by a Tenant must be enticed over the balance of the term of the Lease and for a period of no less than 24 months, whichever is greater, unless otherwise agreed by the parties.

6. Any reduction in statutory charges or insurance received by the Landlord must be passed on to the Tenant in the appropriate portion, if the Tenant pays the relevant outgoings under the Lease.

7. A Landlord should seek to share any benefit it receives due to deferral of loan payments provided by financial institutions in a proportionate manner.

8. Landlords should, where appropriate, seek to waive recovery of any other expense or outgoing payable by a Tenant under a lease term during a period where a Tenant is not able to trade.

9. If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing undue financial burden on the Tenant. No repayment should commence until the earlier of the COVID19 pandemic ending or the existing Lease expiring and taking into account a reasonable subsequent recovery period.

10. No fees, interests or charges should be applied with respect to rent waived under Principles 3 and 4, nor may interest be charged.

11. Landlords must not draw on a Tenants’ security including a cash bond, bank guarantee or personal guarantee, for the non-payment of rent during the COVID19 pandemic.

12. The Tenant should be provided with an opportunity to extend its Lease for an equivalent period of the rent waiver or deferment period.

13. Landlords agree to freeze rental increases during the duration of the COVID19   pandemic.

14. Landlords may not levy any penalties if Tenants reduce opening hours or cease trading during the pandemic contrary to the Lease terms.

Dispute Resolution

 In the event that negotiations between a Landlord and an Impacted Lessee are unsuccessful, the Retail Leases Act has been amended so that the dispute resolution provisions applicable to Retail Leases also now apply to Impacted Commercial Leases, during the Prescribed Period.

Accordingly, the parties are required to participate in a mediation conducted by the Small Business Commissioner.  If the mediation is unsuccessful then a certificate will be issued by the Small Business Commissioner after which proceedings can be commenced in a Court or Tribunal seeking orders to recover possession of the premises and enforce any other rights, including the right to the rental arrears or the enforcement of the principles contained in the Mandatory Code of Conduct.

Land tax

On 21 April 2020 Revenue NSW advised that as part of the economic package released by the New South Wales Government a reduction of up to 25% of Land Tax payable on a parcel of land in the 2020 tax year will be available where: 

1. the land is used for business or residential purposes;

2. the property is leased a residential tenant or business with an annual turnover of up to $50 million who can demonstrate financial distress resulting from the COVID19 pandemic;

3. the Landlord reduced the rent of the affected tenant;

4. the land tax is directly related to the property for which the rent has been reduced;

Financial distress is considered to be:
(a) a 30% drop in revenue for commercial tenants;
(b) a 25% drop household income for residential tenants.

The application can be made online at  https://www.service.nsw.gov.au/transaction/apply-covid-19-land-tax-relief

Where to go from here

It is important to act quickly to commence a dialogue between Landlord’s and Tenants to first ascertain whether the Tenant has qualified for the Jobkeeper Allowance and therefore is an Impacted Lessee.

It is important that both parties provide free and unfettered financial transparency during this time.  The Landlord’s financial impact is also a consideration under principles 4 and 7.  Landlord’s should not expect financial disclosure to only flow from their Tenant. 

Landlords should also have consideration to the practicalities businesses face during the “recovery period”.  Now that businesses have begun reopening, a Lessee may not fully know the impact the COVID 19 pandemic has had on its business immediately upon reopening and it could change on a monthly basis. 

The Mandatory Code of Conduct was not only implemented to ensure businesses can reopen.  The Code of Conduct, if used correctly to share the burden of the COVID 19 pandemic, may prevent the oversupply of retail and commercial properties, driving down market rents, where Tenants have no alternative but to close their business and vacate the rented premises.

Where it is evident that an agreement is unlikely to be reached without a formal mediation, it is in the interest of both parties for an application for mediation to be lodged as a matter of urgency. 

When an agreement has been reached it should be documented in a formal Variation of Lease registered with Land Registry Services (if the Lease was registered).  Whilst Landlords will be unable to recoup the cost of preparation of the Variation of Lease from its Tenant, a formal Variation of Lease will be required to extend the term of the Lease and to ensure any deferred rent can be recovered in the event of a future default.

If you require any advice in relation to the Mandatory Code of Conduct please do not hesitate to contact Kate MacDonald who acts for both Landlords and Tenants in respect of commercial, retail and industrial property.

Kate MacDonald

Solicitor Director