The spread of Coronavirus (COVID-19) to Australia has seen some extreme government policy come into action. In particular, from 23 March 2020, the Australian government has ordered a shutdown of certain types of businesses in order to combat the spread of the virus.
This may be a necessary measure to fight the spread of COVID-19, but it is incredibly disruptive to businesses. For businesses that have had to close their premises or are otherwise affected by the shutdown, you might be struggling to afford rent. So, what are your legal options?
Things are changing rapidly with new government announcements every day, so it’s important to keep on top of these changes. On 7 April 2020, the government announced a Mandatory Code of Conduct to be followed by landlords and tenants of commercial leases.
To help you navigate these difficult times, here are some answers to the common questions we’ve been getting from our clients on the legals affecting commercial leases.
What Is The Mandatory Code Of Conduct For Commercial Leasing?
The Mandatory Code of Conduct is a set of commercial leasing principles designed to apply during the COVID-19 pandemic. It was drawn up by the national cabinet and was announced by the Prime Minister on 7 April 2020.
The purpose of the Code is to bring landlords and tenants together and work out a solution in good faith to get through the crisis. There are specific items in the Code which require each party to take a share of the burden and negotiate a fair outcome.
In short, tenants who are economically affected by the COVID-19 pandemic should be able to point to the Code to get the landlord to provide some form of relief. It also bans the landlord for terminating the lease or drawing on the tenant’s security.
In return, it requires the tenant to act in good faith and honour the lease.
Is The Mandatory Code Of Conduct Binding?
Yes — the Code came into effect on 3 April 2020 and if your business has a turnover of less than $50 million and is eligible for the JobKeeper program, the Code should apply as it is a mandatory code of conduct applying to all commercial tenancies.
The details around enforcement have not yet been announced but the Code will be given effect through relevant state and territory legislation or regulation.
Importantly, any disputes on reaching an agreement relating to COVID-19 will be subject to binding mediation.
What Relief Is Available To Tenants Under The Mandatory Code of Conduct?
Landlords must offer tenants rent relief — by waivers (ie. free rent) or deferrals — that are proportionate to the reduction of trade as a result of COVID-19.
For example, if you’re a gym that has had to completely shut down due to the government directive and now have zero income, then the landlord must offer you 100% rent relief in one way or another. Or, if you’re a cafe that is now only allowed to do takeaway and you’ve seen a 50% reduction in sales, then the landlord must provide you with relief that is worth 50% of rent.
Then, at least half of this relief must be in the form of the waiver. So, in the above example, the gym is entitled to at least half of the full rent to be completely waived, and the other half to be deferred. For the cafe, it will still have to pay 50% rent as usual, 25% deferred, and 25% waived.
Finally, the repayment of the deferred rent must be amortised over either the remainder of the lease term, or 24 months, whichever is the longer period. Meaning you’ll have at least 24 months to pay it back, or longer if there’s more time remaining on your lease.
The Code allows parties to negotiate other deals that are more suitable to them, but as a tenant it’s worth keeping in mind that you’re at least entitled to this kind of arrangement.
What Other Landlord Obligations Are In The Mandatory Code of Conduct?
The Code also sets out a number of other principles that apply for the duration for the COVID-19 pandemic. Here’s a summary of those:
- No termination: Landlords must not terminate leases due to non-payment of rent.
- Rent increase freeze: Landlords must agree to a freeze on rent increases.
- Penalties related to trading hours: Landlords must not penalise tenants for reduced opening hours and ceasing to trade.
- Interest on unpaid rent: Landlords must not charge interest on unpaid rent, including those that have been waived or deferred by arrangements under the Code.
- Bank security/deposits: Landlords must not draw on bank securities, cash bonds, personal guarantees (and the like) for the non-payment of rent.
- Land tax and council rates: Any reductions in land tax or council rates must be passed on to the tenant.
My Landlord Isn’t Being Transparent. What Can I Do?
You might have already tried to get relief from your landlord but all you’re getting are excuses about how they can’t afford any reductions.
They claim that they have to pay mortgage, land tax, council rates, building insurance, and so on — but they haven’t given you any details about how much they’ll be out of pocket.
If you’re in this situation, the Code now requires all parties to provide sufficient and accurate information to each other, including accounting data, bank statements and invoices.
If you feel like your landlord isn’t being transparent, you can point them to this requirement in the Code and get them to provide you with proper information.
What Are My Obligations As A Tenant?
You’ll only be able to rely on the Code if you uphold your end of the bargain as the tenant.
The most important thing to remember is that the tenant must remain committed to the terms of the lease. Failure to honour the lease might mean that you won’t get any of the protections provided under the Code.
There is an overarching requirement for both parties to act transparently and in good faith. The requirement to provide sufficient and accurate information to each other also applies to tenants — so make sure that when you tell the landlord you’re experiencing hardship, you can back this up with numbers.
Steps To Negotiate With Your Landlord
Here are three simple steps you should take to negotiate a resolution with your landlord.
Step 1: Assess Your Situation
Do an analysis of your cash flow situation and what sort of relief you’ll need from the landlord to keep afloat. It might be difficult to do this during such a stressful time, but thinking objectively and long-term will give you the best awareness of your options.
The Code will give you some extra protections that might be stronger than your normal rights under the lease. But you should still carefully review your lease — and have it professionally reviewed by a lawyer if possible — so that you know exactly what your fallback options are.
Think also about what bank securities and personal guarantees are at risk, as well as any valuable assets you may have that a landlord might be able to come for after the pandemic is over.
Step 2: Propose A Deal
Once you have an idea of what you need to survive, propose a deal to the landlord. Everyone has their own negotiating style, but it’s often a good idea to set out exactly what you want in writing.
When you’re proposing the deal, you should reference the Code to demonstrate that you’ve done the research and, if you haven’t already, provide them with details of how you’ve been affected by COVID-19. Make sure you can back up any claims you’re making about this impact and that you’re always negotiating in good faith.
You should also expect a counter offer, so keep that in mind when proposing a deal.
Step 3: Have The Arrangement In Writing
If you and your landlord have reached an arrangement, make sure you have this in writing so that there are no misunderstandings down the track.
It has been a few weeks coming, but the government has finally provided some guidance on how to deal with commercial leases in the face of COVID-19.
The new Mandatory Code of conduct provides protections to tenants who are affected and it’s important for all parties to negotiate in good faith.
For further information or help reviewing your commercial lease, feel free to contact us at Sprintlaw as we’re happy to help during this difficult time. You can reach us at 1800 730 617 or email us at email@example.com.
Also, be sure to monitor our Coronavirus resource page where we’ll be sharing the latest news and developments as they come in.
Editor’s note: The information in this article is correct as of 8 April 2020. With the legal landscape surrounding Coronavirus changing so rapidly, we recommend speaking with a lawyer to fully understand your options during this time.
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