The National Cabinet has released a mandatory Code of Conduct which seeks to impose good faith leasing principles on landlords and tenants where the tenant is experiencing financial hardship as a result of the COVID-19 pandemic.
The objective of this Code is to mitigate the impact of the COVID-19 pandemic on the tenant. Landlords are expected to shoulder some the financial burden.
The Code is not yet law in Victoria.
We expect the Victorian Parliament will pass enabling legislation shortly.
Who does the Code apply to?
The Code applies if the tenant:
- is experiencing financial hardship as a result of the COVID-19 pandemic;
- is eligible for the Commonwealth Government’s JobKeeper program; and
- has an annual turnover of up to $50 million.
When will the Code commence and end?
Until legislation is passed, the commencement is uncertain. However, the Code indicates the commencement will be a date after 3 April 2020. The legislation may make the Code retrospective, but this statement indicates that it is unlikely to apply before 3 April 2020.
The Code’s operation will likely be tied to the period during which the JobKeeper program remains operational.
What are the new restrictions and obligations on landlords?
The Code requires:
- the parties to act in good faith and in line with the leasing principles set out in the Code; and
- the landlord to offer a proportionate reduction in rent in the form of waiver and deferral.
What is proportionate is based on the impact of the pandemic on the tenant, with specific regard to the tenant’s revenue, expenses and profitability.
The Code mandates the rent waiver component must be at least 50% of the relief given to the tenant. The balance of relief may be deferred and amortised over a period of at least 24 months or the balance of the term (whichever is greater).
The Code also imposes the following restriction and requirements.
Landlords:
- must not terminate leases for non-payment of rent;
- must pass on any reduction in statutory charges (land tax, council rates) must be passed onto the tenant on a proportionate basis;
- should seek to share the benefit of any deferral of loan repayment under its mortgage;
- must not draw on any security for non-payment of rent (bank guarantees, cash bonds or personal guarantees);
- cannot increase rent by way of rent reviews;
- cannot enforce trading hours obligations or require the tenant to remain open for business; and
- cannot charge a tenant interest on deferred payments.
Tenants must otherwise comply with the terms of their lease or forfeit the protections under the Code.
What happens if agreement can’t be reached?
If agreement cannot be reached, then the Code contemplates the parties entering into mediation.
In Victoria, this is likely to be through the Small Business Commission, which currently provides dispute resolution for retail leases.
What should a landlord do if tenant seeks rent relief?
Based on the Code’s leasing principles, the parties are to act in good faith, in an open and transparent manner.
The obligation to act in good faith refers to a party’s conduct in negotiations — it does not require a party to act against its own interests.
It is reasonable for landlords to request sufficient information to establish the Code applies to the tenant and to also quantify the proportion of rent relief, by reference to impacts on revenue expenses and profitability attributable to the pandemic.
KCL Law’s property team are experienced negotiators, able to assess the particular circumstances of a tenancy and advocate to achieve the best outcome for the client in the context of the Code.
As noted, the Code is not yet law and the position may change further when enabling legislation is passed by the Victorian government.
More information
If you require advice or assistance on how this may impact you, please contact Morgan Scholz, Head of Property, on (03) 8600 8890, Mark Yaskewych, Principal Lawyer, on (03) 8600 8830 or Geoff Kliger, Special Counsel, on (03) 8600 8878.
Author
This Property update was authored by Morgan Scholz, Head of Property.
Note: This update is a guide only and is not intended to constitute legal advice.