In response to the coronavirus (COVID-19) pandemic that is currently impacting Australia and the world, the National Cabinet agreed on 7 April 2020 that all Australian states and territories would implement a mandatory “Code of Conduct” for commercial tenancies.

What is the purpose and objective of the Code?

• To impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants.
• To share, in a proportionate and measured manner, the financial risk and cashflow impact during the COVID-19 pandemic period (as defined by the period during which the JobKeeper programme is operational), whilst seeking to appropriately balance the interests of tenants and landlords. 

Who does it apply to?

Business tenants with annual turnover of up to $50 million and who are also eligible for the Commonwealth Government’s JobKeeper programme.

When does the Code come into effect and how long will it apply?

Each state and territory will have its own “effective date” (to be after 3 April 2020) to bring the Code into effect.  The Code will be given effect through relevant state and territory legislation or regulation. The Code is not intended to supersede such legislation, but aims to complement it during the COVID-19 pandemic period.  Please check the relevant state or territory government website for updates on the implementation of the Code in your state or territory.

The Code is expressed to apply during the COVID-19 pandemic period, as defined by the period during which the JobKeeper programme is operational.  However, some of the leasing principles in the Code (see further detail below) may extend for a “reasonable subsequent recovery period”.

What are the principles under the Code?

The Code sets out 11 overarching principles to guide any temporary arrangements that may be required to be agreed between landlords and tenants during the COVID-19 pandemic period.  These principles generally encourage landlords and tenants to work together to negotiate in good faith and act in an ‘open, honest and transparent manner’ to agree appropriate temporary leasing arrangements to achieve mutually satisfactory outcomes.

The Code also sets out the following 14 leasing principles to guide landlords and tenants in negotiating and implementing any temporary commercial leasing arrangements that may be required during the COVID-19 pandemic period: 

1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
2. Tenants must remain committed to the terms of their lease, subject to any amendments negotiated under the Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under the Code.
3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (including other forms of agreed lease variations such as pausing and/or hibernating the lease) 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.
4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle 3 above over the COVID-19 pandemic period.  An example of how this principle would apply is included in the Code.  Rental waivers 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 fulfill their ongoing obligations under the lease agreement. Regard must also be had to the landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
5. Payment of rental deferrals by the tenant must be amortised over the greater of: (a) the balance of the lease term; and (b) a period of no less than 24 months, unless otherwise agreed by the parties.
6. Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
7. A landlord should seek to share with the tenant in a proportionate manner, any benefit the landlord receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response (or any other case-by-case deferral of loan repayments offered to the landlord).
8. Landlords should, where appropriate, waive recovery of any other expense or outgoing payable by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords may reserve the right to reduce services as required in such circumstances.
9. If negotiated arrangements under the Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic period ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
10. No fees, interest or other charges should be applied with respect to rent waived in principles 3 and 4 above and no fees, charges nor punitive interest may be charged on deferrals in principles 3, 4 and 5 above.
11. Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the COVID-19 pandemic period and/or a reasonable subsequent recovery period.
12. The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in principle 2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.
13. Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic period and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
14. Landlords may not apply any prohibition or levy any penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.

While the leasing principles are high-level and, in some cases, their practical application may be unclear, landlords and tenants should be guided by the overarching principles.  Further guidance and/or updates on this subject matter may also become available as the Code is implemented in each state and territory.

What happens if the landlord and tenant cannot agree on temporary leasing arrangements under the Code?

The matter should be referred to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation (including Small Business Commissioners / Champions / Ombudsmen, where applicable).

Where can I get a copy of the Code?

You can access a full copy of the Code via this link, which is made available by the National Cabinet: National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles during COVID-19

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If you have any questions regarding the effects of the COVID-19 pandemic on a commercial lease, please get in touch with one of the Sierra Legal team members.