Following the National Cabinet (NC) on Friday 3 April, the Prime Minister announced that a mandatory Code of Conduct for small and medium commercial and retail tenancies will be developed by industry and legislated by the various State and Territory governments.
What will the Code do?
Specific detail has not yet been provided, however, the PM indicated that the principles guiding the Code will be:
- where possible, tenants should continue to pay rent;
- where a tenant is financially distressed as a result of COVID-19, tenants and landlords should work together to negotiate a mutually agreeable outcome;
- to ensure that the burden is shared between landlords and tenants, rent and other money payable under the lease should be waived proportionately to any reduction in the tenant’s turnover;
- termination of leases, lockouts and evictions for non-payment of rent will be prohibited;
- there will be a freeze on rent increases (excluding leases where rent is based on business turnover);
- where tenants are forced by the crisis to stop trading or reduce opening hours, any penalties will be prohibited;
- landlords will be prohibited from:
- passing land tax on to their tenants;
- charging interest on unpaid rent;
- calling on bank guarantees or security deposits for non-payment of rent;
- legislative and other barriers to extensions of lease will be removed so that tenants and landlords can agree on lease extensions in exchange for rent waivers;
- landlords and tenants are to agree between themselves how amendments to their lease will be documented and applied to the lease to reflect their new arrangement(s) under the Code.
Who will develop the Code?
The PM stated that the Code will be industry-developed. This will almost certainly include the Property Council of Australia (PCA) and its various state and territory divisions, together with other peak property and retail industry bodies across Australia.
Who will the Code apply to?
Importantly, the Code will exclude residential and large commercial tenants, and is proposed to apply only to tenant businesses which have a turnover of less than $50 million and are participating in the Federal JobKeeper program. Practically, this means that to fall within the Code, a business must have a turnover of less than $50 million and must also have (already) evidenced a more than 30% reduction in its turnover.
When will the Code come into effect?
There is still substantial work to be done, so the effective date is uncertain. The Code is earmarked for discussion at the next meeting of the NC, the expectation being that the NC will reach resolution on its detail and application by the end of this week. The Code will then go to industry for development and, once finalised, will be legislated by the State/Territory governments before coming into effect.
The PM indicated:
- the readiness of Federal, State and Territory governments to address issues related to other costs incurred by landlords. An example is land tax, where the PM announced agreement between the States and Territories to consider providing a (minimum) three-month land tax waiver and three-month land tax deferral for eligible landlords, with those landlords to pass on any benefits to their tenants;
- where parties to a lease sign up to the Code, the ability for tenants to terminate leases on the grounds of financial distress (as raised in the NC statement on 29 March) will not apply. (In passing, we do not yet understand what signing up to the Code means. This detail needs clarification);
- that mediation under the Code will be dealt with under, and subject to, existing State and Territory mediation mechanisms;
- that banks have a role to play in supporting all tenancy relief measures, stating that “…we would expect banks to be very supportive of the agreements reached by landlords and tenants who would be working under this mandatory code”;
- that outside of the Code, State and Territory governments are expected to develop a range of exemptions, waivers, and reductions with respect to moneys payable under a lease, to assist both landlords and tenants. These parallel matters may vary from State to State, but in substance they appear to be a material component in attracting stakeholder support.
What does industry have to say?
There has not yet been a comprehensive response from the property industry, but noteworthy comments from industry thus far are as follows:
- The National Retail Association, Australian Retailers Association, the Pharmacy Guild of Australia, and the Shopping Centre Council of Australia had already collectively called, following the PM and NC comments on leasing issues following the 29 March NC meeting, for the implementation of a national Code of Conduct for retail leasing to assist both retailers and landlords during the COVID-19 crisis. They expressed the view that landlords and tenants, with particular reference to shopping centre owners and retailers, have a mutual interest in ensuring business continuity, and stated that an industry Code of Conduct is required to facilitate a nationally consistent approach.
- The PCA has affirmed its continuing and extensive engagement with all levels of government on tenancy issues, and has stated that it will continue working very closely with government, PCA members, and industry peers to work towards a commercially satisfactory and sustainable resolution. It has commented that:
- commercial landlords around Australia have already been supporting affected tenants and are committed to supporting businesses through to the other side of this crisis;
- the needs of tenants experiencing genuine financial hardship must be recognised, but this must be balanced, where applicable, against the possibly significant financial obligations of landlords (which may include mortgages with non-bank or offshore lenders).
As from previous NC proclamations, it is clear that landlords, tenants and banks are expected to collaborate and cooperate to together come to mutually sustainable outcomes with respect to their tenancy arrangements. As to how the Code will be implemented to support this, at least for eligible businesses, we again have to say, ‘watch this space.’
There are other important issues for this sector that also need attention, for example, large tenants, residential tenancies generally and the parallel matters to be provided by each State. Each of these issues is complex, but deserves attention to ensure a coordinated and uniform industry response throughout this crisis.