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COVID-19: CODE OF CONDUCT FOR RETAIL TENANTS The federal government has imposed a set of good faith principles applying to small and medium sized commercial tenancies, such as retail tenants. BTy Bird & Bird Associates Vince Baudille and Adrian Rodrigues. he national cabinet announced the Mandatory Code of Conduct for SME tenants in response to the COVID-19 pandemic in early April, with each jurisdiction to introduce its own legislation. NSW enacted the relevant regulations on April 24. The Code significantly alters the relationship between parties by introducing good faith leasing principles to be applied between landlords and tenants. Key changes implemented by the code are set out below. Eligibility requirements The Code applies: • For the duration of the COVID-19 pandemic and for a reasonable recovery period thereafter. • To tenants: - With an annual turnover capped at $50 million. - That are eligible for the federal government’s JobKeeper program (ie, those businesses that have experienced a drop in revenue of at least 30 per cent). Good faith negotiations The overarching principle of the Code is a requirement to negotiate in good faith and for parties to act in an open, honest and transparent manner, including providing sufficient and accurate information within the context of the negotiations. Entitlement to rent reductions for eligible tenants The Code requires landlords to provide rental abatements proportionate to the SME tenant’s drop in revenue. The abatement (to be spread over the greater of the balance lease term or a period of at least 24 months) is to be applied as follows: • At least 50 per cent of the total abatement must be in the form of a rent-free period. • The balance is to be in the form of a rental deferrals amortised over a period of at least 24 months. Other tenant protections In addition to the rental abatements outlined above, the Code also provides for the following protections: • Freeze on rent increases. • Opportunity for SME tenants to extend their term for an equivalent period of the rental abatement. • No fees, interests or other charges to apply for any rent waiver or deferred rent. • A prohibition on landlords to not draw on the SME tenant’s securities for the non-payment of rent. • A prohibition on landlords on penalising tenants that reduce or cease trading. • A prohibition on lease termination for non-payment. • Waiver of outgoings recovery. • A requirement for the landlord to pass on any concessions they receive (such as reduction of statutory charges) to the SME tenant. Key considerations for landlords and SME tenants For SME tenants to access the benefits of the Code they need to be open and transparent in their dealings with the landlord and be prepared to “open their books” to evidence their reduction in revenue. SME tenants can expect to receive the following requests from their landlords: • Details of SME tenant’s annual turnover together with relevant evidence. • Evidence of the SME tenant’s eligibility for the government’s JobKeeper scheme. • Evidence of the business experiencing a revenue reduction as a direct result of the COVID-19 pandemic. • Details of the SME tenant’s operational changes implemented to deal with the COVID-19 pandemic. • Details of state, territory and local government assistance packages and stimulus measures that apply to the SME tenant. • Details of the SME tenant’s debt and whether any other relief has been made available in this regard. • Details of the SME tenant’s business interruption insurance that covers the payment of rent and outgoings. Foreign investment As a further note, the federal government introduced temporary changes to the foreign investment review framework, designed to protect Australia’s national interest for the duration of the pandemic. Effective from March 29, all proposed foreign investments into Australia (including entering into a lease with a term likely to exceed five years) now require Foreign Investment Review Board (FIRB) approval, regardless of the value/nature of the foreign investment. Monetary threshold amounts are reduced to zero, and processing times for applications are up to six months. LEGAL “For SME tenants to access the benefits of the Code they need to be open and transparent in their dealings with the landlord.” About Vince Baudille At Bird & Bird, Vince is the Global Co-Head of Real Estate and leads the Real Estate Group in Australia/Asia. He has a passion for real estate and the real estate industry with more than 20 years’ legal experience. About Adrian Rodrigues Adrian is a senior associate in the Bird & Bird real estate team, specialising in commercial and property law. He has significant experience in advising clients investing in real estate interests around Australia. About Bird & Bird Bird & Bird is one of the world’s leading international law firms advising industries where technology, regulation and intellectual property are driving change. With its strong Australian presence, clients enjoy global reach across various practice areas. JUN, 2020 RETAIL WORLD 53