UPDATE: The Introduction of a Mandatory Industry Code for Commercial and Retail Leases

03 April 2020

After the National Cabinet meeting, the Prime Minister announced at 2pm on Friday, 3 April 2020 that property industry stakeholders are currently working on an industry code of practice dealing with commercial and retail tenancies (New Industry Code). The Prime Minister also indicated that the draft code is not in a state that’s sufficient to give security to both parties but did set out in detail what the code would look like.

Eligibility criteria

The New Industry Code will be mandated at a Commonwealth level and incorporated at a State and/or Territory level. In order to garner the protections of the Mandatory Industry Code, a tenant must:

  • Have a turnover of less than $50 million;
  • Have a 30% or greater loss in revenue; and
  • Be a participants in the Federal Government’s newly formed Jobkeeper program.

NB: It is currently uncertain how the eligibility criteria of the New Industry Code applies to landlords which will be reviewed following release of the New Industry Code. It is worth noting, however, that the above eligibility criteria seems to sit within the eligibility criteria for the Jobkeeper program. We will continue to update you in this regard.

Good faith discussions

Last week, the Prime Minister announced that the National Cabinet agreed to a moratorium on evictions over the next 6 months for commercial tenancies in financial distress who are unable to meet their commitments due to the impact of COVID-19 pandemic.

It appears that the purpose of the New Industry Code is to facilitate and potentially mandate good faith negotiations between landlords and tenants during the 6 month moratorium on evictions.

The Prime Minister announced that the Federal Government does not wish to be prescribe the manner in which the landlord and tenant can reach agreement on appropriate relief measures in response to the COVID-19 pandemic.

However, the New Industry Code may consider protection of issues around evictions, claims / penalties, acting on guarantees or application of interest on unpaid rent. Further, landlords may also be protected from termination of the lease on those grounds.

Proportionality principle

The New Industry Code adopts a proportionality principle such that:

  • The loss of revenue of the tenant is in proportion to any proposed rent relief granted by the landlord; and
  • The duration of relief is consistent with the period of disruption to the business effected by the COVID-19 pandemic.

Prime minister’s example

If a public health order mandated a tenant closing its doors for 3-6 months and a rent free period was being considered for this duration:

  1. The value of the rent free period could be amortised over the remaining lease term by increasing the rent in proportion to the value of the rent free period; or
  2. The lease term could be extended by the same term as the rent free period.

The Prime Minister indicated that the Bank’s needed to get on board. The approach taken by the Federal Government appears to be consistent with the recent announcement by the Australian Banking Association and participating Banks in respect of business loan relief packages including landlords affected by the COVID-19 pandemic¬†summarised today here.

We hope the New Industry Code will be adopted after National Cabinet meets next Tuesday, 7 April 2020. At this stage, there is no further update on the position concerning residential tenancies due to the complexity associated with these arrangements.

At HWL Ebsworth, our COVID-19 think tank is made up of National Partners (and experts) in the Real Estate and Projects Group, Litigation, Construction, Corporate/Commercial and Insurance Groups who are currently considering in real time the national issues impacting our landlord and tenant clients in respect of the COVID-19 pandemic.

This article was written by Kendra McKay, Partner, Alexandra White, Partner and Maged Jebeile, Special Counsel.

Maged Jebeile

Special Counsel | Sydney

Subscribe to HWL Ebsworth Publications and Events

HWL Ebsworth regularly publishes articles and newsletters to keep our clients up to date on the latest legal developments and what this means for your business.

To receive these updates via email, please complete the subscription form and indicate which areas of law you would like to receive information on.

Contact us