In early April 2020, the National Cabinet announced the introduction of a National Mandatory Code of Conduct (Code) to apply to commercial leases during the COVID-19 pandemic period.
The purpose of the Code is to impose a set of leasing principles that must be adopted by commercial landlords and tenants who fall within the scope of the Code. The principles of the Code provide a framework for the negotiation of arrangements between landlords and tenants to weather the Government’s “Hibernation Strategy” and will affect their respective rights and obligations under their leases.
The Position in Queensland
Queensland has recently enacted the COVID-19 Emergency Response Act 2020 (Qld) (Act), which paves the pathway for regulations to be implemented in Queensland to allow the principles of the Code to be applied and enforced in Queensland.
The principles of the Code are summarised below. While it is expected that the regulations will closely mirror the principles of the Code, regulations have not been passed as at the date of this article and it is important to note that once implemented they may affect the application and enforceability of the Code in Queensland.
Threshold Test
The Code will only apply to leases where the tenant satisfies both of the following conditions:
- the tenant is suffering financial stress or hardship as a result of the COVID-19 pandemic and is eligible for the JobKeeper programme. [It is unclear at this time whether there will be additional methods for demonstrating financial stress or hardship beyond a tenant’s eligibility for the JobKeeper programme].
- the tenant has an annual turnover of less than $50 million.
Duration of the Code
It is expected that Queensland’s regulations will apply retrospectively from on or after 3 April 2020 for the duration of the JobKeeper programme.
Principles of the Code
The principles of the Code provide a framework for the negotiation of rent relief and other temporary measures during the COVID-19 pandemic period, including:
- Rent Relief
Landlords will be required to provide rent relief during the pandemic period and for a subsequent reasonable recovery period proportionately to the reduction of trade in the tenant’s business (having regard to the tenant’s revenue, expenses and profitability). The rent relief must be provided through a combination of:
- Rent waivers (ie, rent-free periods), which must account for at least 50% of the relief offered to the tenant during the pandemic period (unless waived by the tenant).
- The deferral of rent by amortisation after the pandemic period ends (unless otherwise agreed) over the greater of 24 months and the balance term of the lease.
- Rent Reviews
Landlords must not apply rent reviews during the pandemic period and for a reasonable subsequent recovery period (even in accordance with the terms of the lease).
- Outgoings
If the Government passes on a reduction in statutory charges, landlords are required to pass the reduction on to the yenant via a reduction in outgoings (or where multiple tenants within a centre share the outgoing, the reduction must be passed on proportionately).
- Default and termination
Tenants must continue to comply with the terms of the lease (subject to any relief offered by the Code). A material failure to comply with the substantive terms of the lease by the tenant will forfeit any protections offered to the tenant under the Code (how this is dealt with in the regulations will need to be reviewed).
Landlords must not terminate the lease due to the non-payment of rent during the pandemic period and for a subsequent reasonable recovery period. It is unclear at this stage whether how a reasonable recovery period” will be dealt with in Queensland.
- Lease security
Landlords must not apply a tenant’s security (which includes enforcing personal guarantees as well as bank guarantees and security bonds) during the pandemic period and for a reasonable subsequent recovery period.
- Extension of term
Tenants should be allowed the opportunity to extend the lease for a period equal to the period of the rent waiver/deferral period on the existing terms of the lease.
- Trading hours
Landlords cannot enforce any trading/minimum trading hour obligations.
Dispute Resolution
The Code contemplates either party being entitled to refer the matter to mediation where a satisfactory arrangement cannot be negotiated consistently with the Code. How this will be dealt with in Queensland is a matter to be provided for by the regulations.
Author Note
This article pre-dates Queensland implementing the principles of the Code into regulations. If you are a tenant or a landlord we recommend that you seek legal advice before entering into negotiations in reliance upon the Code to ensure that your position reflects the most current legislation and regulations in Queensland. If you would like to discuss this further, please contact Danielle Little of our Commercial Leasing Team on 07 4052 0700.