Commercial tenancies during COVID-19 in Australia

Please note that the information contained below is current as of 11 May 2020 and may be subject to change.

On 7 April 2020 the National Cabinet released the Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (the Code). The Code sets out principles to negotiate amendments to existing commercial (including retail) leases with the aim of sharing, in a proportionate, measured manner, the financial risk and cashflow impact during the coronavirus (COVID-19) pandemic period, whilst also seeking to appropriately balance the interests of both tenants and landlords.

1. When does the Code take effect?

The Code will be given effect through state and territory legislation or regulation as appropriate and will operate for the same period as the Commonwealth Government’s JobKeeper program (that is, until 29 September 2020).[1]

Victoria enacted the Code via the COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic), and New South Wales introduced the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) made under the Retail Leases Act 1994 (NSW) and the Conveyancing Act 1919 (NSW). The other states and territories are doing the same.

2. Who does the Code apply to?

The Code applies to commercial leases, including retail, office and industrial (it does not apply to residential tenancies).

The Code applies to small-medium enterprise tenants suffering “financial stress or hardship” as a result of the COVID-19 pandemic, where the tenant:

• is eligible for the JobKeeper program;[2] and
• has an annual turnover of up to $50 million,[3]

(referred to as SME tenants).

The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).

The Code states that, even if tenants do not meet the criteria set out above, the principles of the Code “should nevertheless apply in spirit to all leasing arrangements for affected businesses”.[4]

It’s important to be aware that there are some variations between the Code released by the National Cabinet and the version ultimately enacted by each of the States and Territories. For example, to be covered by the Code in Victoria an SME tenant needs to be both eligible for, and participate in, the JobKeeper program.

3. Principles of the Code

The Code includes a number of overarching principles to guide the conduct of landlords and tenants in negotiating arrangements, including:

• negotiating in good faith;
• working towards achieving mutually satisfactory outcomes;
• acting in an open, honest and transparent manner;
• in the context of negotiations, providing sufficient and accurate information (e.g. turnover figures and other relevant financial information); and
• agreeing on arrangements which are appropriate for the particular lease and are proportionate to the impact of the COVID-19 pandemic on the tenant.[5]

4. What protections does the Code provide to tenants?

In addition to the overarching principles, the Code also sets out a series of 14 Leasing Principles which “should” be applied as soon as practicable on a case-by-case basis, including:

• a prohibition against landlords terminating leases for non-payment of rent;[6]
• a freeze on rent increases (except for retail leases based on turnover rent);[7]
• penalties for landlords who purport to prevent or penalise tenants who reduce opening hours or cease to trade during the COVID-19 pandemic period;[8] and
• preventing landlords from drawing on a tenant’s security (e.g. bank guarantee, cash deposit personal guarantee or other security) for non-payment of rent.[9]

For the most part the Leasing Principles apply during the COVI9-19 period, but in some cases may also apply for a reasonable subsequent recovery period.

5. Do landlords benefit from the Code?

The most significant benefit for landlords under the Code is that tenants covered by the Code are still required to remain committed to the terms of their lease (subject to any amendments to any negotiated arrangements under the Code). Material failure to comply with the substantive terms of their lease will see tenants forfeit any protections otherwise available under the Code.[10]

For example, if following negotiations, the landlord agrees to rent waiver pursuant to the Code, and the tenant then fails to pay that portion of rent waived, the protections provided by the Code would be forgone.

6. What if the parties can’t reach an agreement?

If the parties are unable to reach an agreement on temporary lease arrangements, either party may refer the matter for binding mediation through the applicable state or territory dispute resolution process.[11]

Need help?

If you are a landlord or tenant, please do not hesitate to contact us if you would like to know more about how the Code, and applicable state and territory legislation, affects you.

[1] National Cabinet Mandatory Code of Conduct, SME Commercial Leasing Principles During COVID-19 (The Code), “Purpose”.

[2] For more information on JobKeeper payment eligibility, please see the Australian Government’s Business “JobKeeper payment for employers and employees” page.

[3] The Code, “Purpose”.

[4] The Code, “Purpose”. Please note that under the NSW Regulations there is no reference to “in spirit” application of the Code’s Leasing Principles to non-qualifying leases.

[5] The Code, “Overarching Principles”.

[6] The Code, Leasing Principle 1.

[7] The Code, Leasing Principle 13.

[8] The Code, Leasing Principle 14.

[9] The Code, Leasing Principle 11.

[10] The Code, Leasing Principle 2.

[11] The Code, “Binding Mediation”.