A guide to the National Cabinet's mandatory code of conduct for small and medium enterprise commercial leasing principles during COVID-19

Eligibility

The Code will apply to tenants that are eligible for the Commonwealth Government's JobKeeper program with an annual turnover of up to $50 million. In the case of retail corporate groups and franchises, the $50 million threshold will be applied at the group level (rather than individual retail outlet level) and the franchisee level, respectively.

If a tenant does not fall into this category, the National Cabinet believes the Code should still apply, in spirit, to all leasing arrangements for affected businesses, but this is not mandatory.

Timing

The Code will be given effect through state and territory legislation. Each state and territory will determine when the Code will come into effect following 3 April 2020 and it will continue for as long as the Commonwealth JobKeeper program remains operational.

Key negotiation principles

• Parties must negotiate in good faith, appropriate temporary leasing arrangements.
• Agreements must take into account the financial impact of the COVID-19 pandemic on the tenant.
• Due regard must be given to whether the tenant is in administration or receivership.
• All leases must be dealt with on a case-by-case basis, and the tenant's specific case should be taken into account in formulating any temporary arrangements.
• Parties must provide sufficient and accurate information within the context of negotiations (such as accounting information detailing the level of financial stress).
• Parties must assist each other in their respective dealings with other stakeholders including governments, utility companies and financial institutions.

Key leasing principles

• Tenants must remain committed to the terms of their lease. Tenants are not entitled to the protections of the Code where they are in substantial breach of the lease.
• Landlords must offer tenants proportionate rent reductions in the form of waivers and deferrals of up to 100% of the amount ordinarily payable based on the reduction in the tenant's trade during the COVID-19 pandemic period and a subsequent reasonable recovery period, absent of fees, interest or other punitive charges.
• Rental waivers (which are not repayable) should constitute no less than 50% of the total rent reduction, unless otherwise agreed by the tenant, 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 its lease. Regard must also be had to the Landlord's financial ability to provide such waivers.
• Rental deferrals 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. Repayments should be deferred until the earlier of the COVID-19 pandemic ending or the existing lease expiring, and taking into account a subsequent reasonable recovery period.
• Landlords should seek to share the benefit of loan deferrals.
• Landlords should provide an opportunity to extend the lease for an equivalent period of the rent waiver and deferral.
• Landlords should seek to reduce the tenant's outgoings where they are unable to trade. In those cases, landlords reserve the right to reduce services.
• Landlords should proportionately pass on the benefit of any reduction in statutory charges (such as land tax and council rates) and insurances.
• Landlords should not charge interest on rental deferrals, and should not apply any prohibition or levy any penalties where tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
• There should be a freeze on rental increases (excluding turnover rent) and landlords should not terminate leases nor draw on tenant securities due to non-payment of rent during the COVID-19 pandemic period and a subsequent reasonable recovery period.

Mediation

Where parties are unable to reach agreement, the matter may be referred to commercial leasing dispute resolution processes for mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.

Next steps

Further details on the mandatory code will come in due course once the states and territories each legislate the Code. In any event, the Code is now in effect, and all affected businesses should invite discussion on their leasing arrangements.

For a variety of reasons it will be critical to accurately document all arrangements made pursuant to the Code, generally by way of a deed of variation of lease.

Mortgagees may also be required to provide consent to the arrangements and it would be prudent for landlords to discuss any proposed arrangements with their mortgagee.

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.