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On 7 April 2020, the Prime Minister announced the National Cabinet’s Code of Conduct for commercial tenancies.

To implement the Code of Conduct ("the Code"), the NSW Government enacted the Retail and Other Commercial Leases (COVID-19) Regulation 2020, on 24 April 2020.

The Regulation puts in place temporary measures to:

  • share the economic impacts of COVID-19 between commercial landlords and tenants
  • maximise the number of businesses that can resume operation when public health orders are lifted.

These measures apply for an initial period of 6 months, commencing 24 April 2020. They will be reviewed regularly as the COVID-19 pandemic has created a rapidly changing environment, and the NSW Government will be ensuring the rules continue to be appropriate.

Note: The measures cover holdover leases, but do not cover new leases entered into after 24 April 2020.

Code of Conduct Leasing Principles

In renegotiating rent, landlords and eligible tenants must have regard to the following Leasing Principles.

These principles should be applied as soon as practicable on a case-by-case basis:

  • Principle 1: Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
  • Principle 2: 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.
  • Principle 3: Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% 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.
  • Principle 4: Rental waivers must constitute no less than 50% of the total reduction in rent payable under Principle 3 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% minimum waiver by agreement.
  • Principle 5: 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.
  • Principle 6: 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.
  • Principle 7: A landlord should seek to share any benefit they receive 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.
  • Principle 8: Landlords should, where appropriate, seek to waive recovery of any other expense (or outgoings 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.
  • Principle 9: 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.
  • Principle 10: No fees, interest or other charges should be applied with respect to rent waived in Principles 3 and 4 and no fees, charges nor punitive interest may be charged on deferrals in Principles 3, 4 and 5.
  • Principle 11: 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.
  • Principle 12: The tenant should be provided with an opportunity to extend their lease for an equivalent period of the rent waiver and/or deferral period outlined in Principle 2. 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.
  • Principle 13: 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.
  • Principle 14: Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

Landlords and tenants can adopt alternative arrangements that work for them provided both landlord and tenant agree to these arrangements.

Information for tenants and landlords

Tenants

The Regulation applies to commercial (retail, office and industrial) tenants that:

  • had an annual turnover of less than $50 million in 2018/2019, and
  • have experienced at least a 30% decline in turnover due to COVID-19 (or 15% in the case of not for profits), compared with a corresponding month or quarter in 2019.

The $50 million annual turnover threshold applies to franchises at the franchisee level, and to retail corporate groups at the group level (rather than at the individual retail outlet level).

The eligible entity and decline in turnover tests are the same as the tests for JobKeeper.

To demonstrate eligibility, tenants will need to provide their landlords with:

  • tax returns and/or Business Activity Statements (BAS) to demonstrate an annual turnover of less than $50 million in 2018/2019
  • evidence of their eligibility for JobKeeper, or
  • evidence of at least a 30% decline in turnover if the business is not receiving JobKeeper – for example, a business with casual staff of less than 12-months standing.

Tenants must provide landlords with sufficient documentation to demonstrate the actual decline, in order to calculate rent reduction.

Landlords should act reasonably and not place onerous requests on tenants for documentation.

Landlords must treat information provided by tenants as confidential, and use the information only for the purpose of complying with the NSW Regulation.

Landlords

Individual landlords and tenants would normally negotiate their own lease arrangements. However, due to the unprecedented nature of the COVID-19 pandemic, government has acted to provide a minimum level of protection for tenants.

Parties are free to adopt alternative arrangements that work for them, provided both landlord and tenant agree to these arrangements.

The Regulation could place additional pressure on landlords, but the government is trying to share the load more evenly during these challenging times.

Landlords with loans are encouraged to contact their banks for additional relief arrangements.

Note: A landlord can still evict a tenant for reasons not related to COVID-19, such as:

  • the tenant has damaged the premises, or
  • the tenant has failed to vacate the premises after the expiry of a fixed term lease.

Relief for tenants

Eligible commercial tenants can ask their landlord to renegotiate rent and other terms of the lease.

Negotiations between tenants and landlords must be had in good faith and have regard to:

  • the economic impact of the COVID-19 pandemic.
  • the Leasing Principles in the Code of Conduct. These include Principles 3, 4 and 5 that refer to rent reduction and apply on a case by case basis:
    • Principle 3: Landlords must offer reductions in rent (in the form of deferrals and waivers) proportionate to the tenant’s decline in turnover. This means:
      • if a tenant has experienced a 40% decline in turnover due to COVID-19, then the landlord must provide a 40% reduction in rent.
    • Principle 4: Rent waivers (as opposed to deferrals) must constitute at least 50% of the rent reduction.
    • Principle 5: Any deferred rent must be paid back over the balance of the lease term or for a period of no less than 24 months, whichever is greater.

Landlords of eligible commercial tenants cannot (unless agreed otherwise by both landlord and tenant):

  • evict a tenant for non‐payment of rent or outgoings
  • evict a tenant because the business is not open during the hours specified in the lease
  • recover a security bond or guarantee for non-payment of rent or outgoings
  • increase a tenant’s rent
  • charge interest or fees on any unpaid rent.

In addition, if an eligible tenant is required to contribute towards land tax or any other statutory charge or insurance payable by the landlord, and this outgoing is reduced, the tenant is exempt from paying the reduced amount.

Tax relief for landlords

Commercial landlords that provide rent relief to eligible tenants will be entitled to land tax relief of equivalent value, up to a maximum of 25% of their land tax liability for 2020 on the relevant property.

Landlords will receive a waiver on land tax if they are yet to pay, or a rebate of previously paid land tax.

Landlords that receive this tax concession will also be able to defer their remaining land tax payments for 3 months.

Mediation and dispute resolution

Commercial landlords and eligible tenants should work together to renegotiate rent and other lease terms.

It is in the interests of all parties to negotiate a mutually beneficial outcome.

Where parties are unable to do this, in the first instance they should contact Service NSW for advice on next steps.

They will need to attend mediation through the Small Business Commission, before any further action is taken. The Small Business Commission’s mediation service can support landlords and tenants to resolve disputes in a cost-effective and non-adversarial way.

The mediator cannot impose any outcome but, if a mediation is successful, parties can enter a binding deed.

If commercial landlords breach their obligations under the NSW Regulation, the tenant must seek mediation in the first instance by contacting Service NSW, and then through the NSW Small Business Commission.

Where the landlord and tenant are unable to reach an agreement through the NSW Small Business Commission, the parties will be able to pursue action through the NSW Civil and Administrative Tribunal (NCAT), or the civil courts.

For urgent matters involving a threatened or actual eviction, interim arrangements can be sought through NCAT or the courts.

For more information on the COVID-19 commercial leasing measures, call 13 77 88 or visit the Small Business Commissioner.