The federal government has announced the release of its previously announced mandatory code of conduct for commercial leasing principles, in order to protect the interests of both tenants and landlords navigating the economic downturn resulting from COVID-19.
According to the code itself, its purpose is to “impose a set of good faith leasing principles” to be applied temporarily, for the duration of the pandemic period, and assist in balancing the interests of both landlords and tenants.
As announced by Prime Minister Scott Morrison, the mandatory code will be legislated and regulated “as appropriate” by each state and territory individually and is “not intended to supersede” state legislation on leasing matters, but complement it for the duration of the crisis.
The mandatory code will apply to tenancies whereby the tenant or landlord is eligible for the JobKeeper program, according to Mr Morrison, being a commercial business in a position of distress, with an annual turnover of $50 million or less.
Key aspects of the new code include making it ineligible for the landlord to terminate a tenancy or draw on a tenant’s security should that tenant’s revenue take a hit during the pandemic, as well as reasonable rental waivers and deferrals that are proportionate to the loss in revenue seen by the tenant.
Further, landlords will be expected to pass on any benefits or reductions they are offered, including mortgage freezes, while reduced statutory charges, including land tax or insurance premiums, should also be passed on in appropriate proportion to the tenant.
Rental reductions and waivers should exceed 50 per cent of the total rental amount and be proportionate to the revenue loss of the tenant, and no fees, interest or other charges should be imposed on tenants requiring rental waivers or deferrals, it has been revealed.
As previously announced, the new code includes the provision of mediation services under the relevant state and territory jurisdictions, for cases in which the landlord and tenant cannot meet an appropriate agreement under the code.
Any decision made on matters under official mediation will be binding, and interested parties are also discouraged by the government from utilising the mediation process in order to drag out dispute proceedings.
“The point here is simple: It’s the same request we made of landlords and tenants about 10 days when I stood up on this issue, and that is that they sit down and they work it out,” Mr Morrison stated.
He continued: “What this does is it preserves the lease – it preserves the relationship.
“It keeps the tenant in their property, and it keeps a tenant on the lease, which is also good for the landlord, and it preserves the lease that is in place that underpins the value of those assets.
“And so this is seen as a proactive and constructive and cooperative mechanism for landlords and tenants to see this through together.”
Mr Morrison also again reiterated that the banks “must come to the table” and provide support to landlords holding mortgages, who may have tenants facing financial hardship.
He particularly called on international banks that operate in Australia, stating: “We will expect those banks to be providing the same levels of support and cooperation, as we are seeing from the Australian banks who are aware of these arrangements.”
The Prime Minister noted that residential tenancies, which are not covered under the code, will also be subject to regulation by the states individually, and that the national moratorium of evictions will be the only protection offered to residential tenants at the federal level.
The leasing principles of the code are as follows:
- Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this code.
- Landlords must offer tenants proportionate reductions in rent payable (in the form of waivers and deferrals) of up to 100 per cent of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- Rental waivers must constitute no less than 50 per cent of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50 per cent minimum waiver by agreement.
- Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other landlords, with the tenant in a proportionate manner.
- Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
- If negotiated arrangements under this code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
- No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above, and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
- Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
- Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
- Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
The code of conduct comes into effect immediately.
Hannah Dowling is a journalist for mortgage business, the leading source of news, opinion and strategy for professionals working in the mortgage industry.
Prior to joining the team at Mortgage Business, Hannah worked as a content producer for a podcast catering to property investors. She also spent 6 years working in the real estate sector at a local agency.
Hannah graduated from Macquarie University with a Bachelor of Media and Journalism.