The Prime Minister has released (ish) a new compulsory Code of Conduct for parties to commercial leases. Landlords will not be able to terminate for non-payment of rent, and tenants will have no protections if they fail to pay their rent. Makes sense? We don't think so.

After waiting weeks for the government's low-down on its proposed commercial rent relief package, we finally received the SME Commercial Leasing Principles During COVID-19 yesterday. Unfortunately, it reads more like a mish-mash of random thoughts than a clear set of rules providing certainty to the majority of businesses during the pandemic. For starters is this Code mandatory or not? It's titled 'mandatory', but then goes on to say that parties 'should' implement the principles outlined.

Fortunately, the Code will need to be adopted by legislation in each state and territory, and so we hope the legislative drafters can do a better job than the National Cabinet.

One thing which is missing? Cash for affected landlords and tenants. This is the first part of the government's COVID-19 response which does not include financial assistance. Rather, it is an attempt at interfering in private agreements between businesses and shifting the 'pain' between them.

Anyway, here are our thoughts on how we think it is supposed to work.

The Code applies to any party to a commercial lease who is suffering financial stress or hardship as a result of the COVID-19 pandemic, has a turnover under $50 million, and qualifies for the JobKeeper Payment.

It encourages parties to work towards achieving the following outcomes, which will apply on a case-by-case basis:

  • Termination – Landlords cannot terminate a lease for non-payment of rent during the period of the pandemic or a reasonable subsequent recovery period. No guidance is given as to what circumstances mark the end of the pandemic (let alone what constitutes a reasonable recovery period).
  • Tenants must remain committed to the terms of their lease – Again, we're not sure what 'remain committed' means, but it would appear the payment of rent (even at the agreed reduced rate) is not included as a landlord cannot terminate for non-payment.
  • Reductions – Landlords must offer rent reductions to their tenants. The rent reduction should correspond to the reduction in the tenant's trade as a result of COVID-19.
  • Waivers – A rent reduction can include a combination of rent waiver and deferral, but the waiver must constitute at least 50% of the total reduction, unless the landlord can't afford that and the tenant agrees to waive its right to the waiver.
  • Deferrals – Landlords should not require repayment of deferred rent until after COVID19 is over, and then space out payment over the remainder of the term of the lease or 24 months (whichever is greater) unless agreed otherwise. No fees, charges, or interest should be applied on these deferrals.
  • Passing on benefits – Where landlords have been approved for COVID-19-related deferrals on their loan repayments they are expected to share the benefit with their tenants. Considering for landlords this is only a deferral of loan repayments, we are not sure whether a deferral of rent payments (rather than waiver) constitutes 'sharing the benefit'. Also, landlords must pass on any reductions in outgoings they receive.
  • No drawdown on security – Landlords cannot draw on a tenant's security (bond or bank guarantee) during the pandemic and the recovery period. As many landlords and tenants have already agreed that this occur in lieu of rent payments we wait to see if parties can agree otherwise.
  • Freeze on rent increases – Landlords cannot impose increases in rent otherwise provided for in the lease.
  • Obligation to trade – Landlords cannot enforce obligations on tenants to occupy premises or be open for trade.

Our primary piece of advice to you (whether you're a landlord or a tenant) is to start these conversations early. Know your legal rights and your commercial position. Be open and honest. It's important you can come to an agreement because, according to the Code, you may otherwise need to spend money on binding mediation.

While this is all sounding a little loose at the moment, we will let you know when the states have provided the certainty we are looking for.

We do not disclaim anything about this article. We're quite proud of it really.