Last week the National Cabinet of the Commonwealth of Australia announced a Mandatory Code of Conduct (the “Code”) to govern commercial leasing arrangements impacted by the COVID-19 pandemic. Effective as of April 3, 2020, the Code imposes a set of good faith leasing principles to be applied when negotiating amendments to commercial leases between landlords and tenants. The Code seeks to relieve financial stress and hardship on tenants as a result of the COVID-19 pandemic. As in Australia, commercial leasing arrangements in the United States are similarly affected by the COVID-19 pandemic. This article examines what the United States can learn from Australia’s Code and offers practical takeaways for landlords and tenants in the United States.
Australia’s Code
The Code acknowledges that each commercial arrangement is unique and that application of the principles should be on a case-by-case basis. Highlights from the fourteen (14) leasing principles set forth in the Code include:
- Landlords may not terminate leases due to non-payment of rent.
- Landlords must offer tenants reduced rent of no less than 50 percent and up to 100 percent of the amount ordinarily payable, based on the reduction in the tenant’s trade.
- Tenants should be provided with an opportunity to extend the lease for an equivalent period of the rent waiver and/or deferral period.
- Payment of rent deferrals by tenants must be amortized over the balance of the lease term or for a period of no less than twenty-four (24) months, whichever is greater.
- Landlords should seek to share any benefit they receive due to deferral of loan payments with tenants in a proportionate manner.
- Landlords should seek to waive recovery of any other expense by a tenant and may reduce services accordingly.
- Landlords must freeze rent increases.
- Landlords may not apply any penalties if tenants reduce operating hours.
What Can the United States Learn from Australia’s Code?
Landlords and tenants in the United States are navigating similar issues as a direct result of the COVID-19 pandemic. Unlike commercial property arrangements governed by Australia’s national approach, commercial leasing arrangements in the United States currently remain governed by lease terms and a patchwork of federal, state and local laws.
Should the United States implement its own “code” to guide commercial leasing arrangements?
Potential “Benefits” include:
- Creates a uniform framework to guide landlords and tenants during a period of uncertainty.
- Encourages landlords and tenants to view themselves as long-term business partners rather than parties to a contractual agreement.
- Pro-actively addresses issues between landlords and tenants and could ultimately reduce costs (e.g., avoiding litigation, bankruptcy or other mechanisms for resolution).
Potential “Drawbacks” include:
- A similar mandate may be difficult to implement in the United States. Any mandate would likely need to be issued by each state rather than at the federal level.
- In certain cases, the risk may simply be shifted to a landlord rather than balanced proportionately (e.g., if a landlord is still obligated to make its loan payments).
- The rigidity of certain provisions of the Code arguably undermines the spirit of the mandate that the landlord and tenant are business partners.
Practical Takeaways
Some commercial landlords and tenants in the United States are actively implementing practical variations to their commercial arrangements to mitigate the impact of the COVID-19 pandemic. Ultimately, the relationship between a landlord and a tenant must remain one of mutualism, where both parties benefit from the association.
While the United States is unlikely to implement any uniform program, it may be prudent for organizations that own real property to implement their own internal policy for commercial leasing arrangements during the COVID-19 pandemic. Such a policy would provide a consistent framework for all of the organization’s leasing arrangements. For health care real estate arrangements, notwithstanding any Stark Law waiver that may be applicable, such a policy would ensure that all leasing arrangements remain compliant with applicable law. Any policy should seek to share COVID-19 related burdens proportionately between landlords and tenants while allowing flexibility for a tailored approach to address each specific commercial leasing arrangement.
For more information, please contact:
- Libby Park at (720) 282-2028 or lpark@wp.hallrender.com;
- Matt Paradiso at (248) 457-7844 or mparadiso@wp.hallrender.com;
- Gerard Faulkner at (214) 615-2036 or gfaulkner@wp.hallrender.com; or
- Your regular Hall Render attorney.
Hall Render’s attorneys and professionals continue to maintain the most up-to-date information and resources at our COVID-19 Resource page, through our 24/7 COVID‑19 Hotline at (317) 429-3900 or by contacting your regular Hall Render attorney.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
