Renting in good-faith

The disruption and hardship faced by landlords and tenants due to COVID-19 has impacted their commercial leases, affecting offices, retail and logistics.

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The Federal Government responded with a Mandatory Code of Conduct, outlining a set of good-faith leasing principles to support negotiations between landlords and their tenants.

"Most landlords are genuinely trying to apply a spirit of good-faith approach and look after their SME tenants.”\

Most landlords are genuinely trying to apply a spirit of good-faith approach and look after their small-medium enterprise (SME) tenants but they are challenged by complexities that arise due to the differences in how the various states and territories have separately legislated the Code.

While the Code aims to balance the interests of landlords and tenants, each state and territory will legislate as appropriate. This scenario has resulted in uncertainty across the industry as each State and Territory applies regulations in slightly different ways.

This ambiguity creates complications for landlords who either have operations in multiple states or who negotiate agreements with tenants whose leasing footprint spans multiple jurisdictions.

The most obvious differences appear upfront in the various regulations, namely the duration of the regulations in each state and territory.

The Code allows for protections to apply during the pandemic period and recovery - but the recovery period has not been defined by the government. Moreover, the pandemic period and any recovery period has been inconsistently applied by the states and territories.

There are also differences in eligibility for protection under the Code in the way that SMEs are defined, differences in the way the Code is imported and applied, and considerable practical differences in the way in which negotiations between the parties are to occur.

For example, in relation to the definition of small to medium-sized enterprises (SME), Victoria requires SME tenants not only qualify for, but also participate in, the JobKeeper scheme, Other states like NSW, simply require tenants to qualify for JobKeeper under certain sections of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020.

Pace of change

Differences also arise in the way the Code is given effect in each jurisdiction. For example, New South Wales has implemented the majority of the Code by reference. For example, when renegotiating the rent payable and other terms of a lease in New South Wales, parties are only required to 'have regard' to the good-faith leasing principles set out under the Code.

Distinctions can also be made in relation to the rent relief process. For example, tenants can apply for rent relief more than once in Victoria, Queensland and Western Australia. In Western Australia, tenants can apply for additional rent relief in two circumstances. A tenant can apply for further relief where its financial circumstances have materially changed since entering into the initial rent relief agreement. A tenant may also apply where they entered into such an agreement before the Regulations took effect and believe the relief is less favourable than the relief that might be provided under the regulations.

The pace of change can be unnerving for the industry as so much is unknown about how the Code and the state-based legislation will play out in the future. There is no precedent for a situation like this - but the pathway through uncertainty must be mutual trust between the parties and a focus on good-faith principles.   

In order to emphasise this good-faith approach, all jurisdictions have attempted to balance the interests of landlords and tenants. Some states have tried to do this by requiring parties exchange certain information when renegotiating their lease. In Queensland, for example, parties are required to provide each other with information that is true, accurate, correct and not misleading. The information must also be sufficient to enable the parties to negotiate rent relief in a fair and transparent way. 

Recognising the concern around the code experienced by commercial landlords and their SME tenants who operate in more than one jurisdiction in Australia, MinterEllison has published a new Code of Conduct compendium.

The compendium explains how the Code is applied by each State and Territory Government and offers guidance for landlords and tenants in each jurisdiction to assist them in navigating these differences.

The compendium will be updated as any remaining jurisdictions move to pass regulations dealing with the Code.

Virginia Briggs is Managing Partner for Infrastructure, Construction and Property at MinterEllison

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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