The COVID-19 Code – what we know so far about the National Code for Commercial Tenancies

The National Cabinet has released the National Cabinet Mandatory Code of Conduct (Code) that will be applied by each of the States and Territories in their commercial and retail legislation.

Over a number of press conferences, the Prime Minister has outlined various aspects of the Code which comes into effect in all States and Territories on a date prescribed in the legislation after 3 April 2020 and will continue until the Commonwealth JobKeeper Program remains operational.

The Code includes a number of principles that have not yet been incorporated into the legislation however we have outlined these key aspects of the Code below:

• The purpose of the Code is to impose a set of good faith leasing principles between the parties to aid cashflow for small and medium business whose business has been impacted by the COVID-19 pandemic.
• The Code will apply to tenancies eligible for the Government’s JobKeeper Program with an annual turnover up to $50 million.
• The Government intends that the Code will be agreed between the parties and tailored for the unique circumstances of the tenancy arrangement.

The Government has outlined the following overarching principles that will guide the application of the Code in practice:

• The parties are to work together to ensure business continuity and facilitate business returning to usual trading activities after the COVID-19 pandemic and a reasonable recovery period.
• The parties will negotiate appropriate temporary leasing arrangements and work to negotiate in good faith and achieve mutually satisfactory outcomes.
• The parties will act in an open, honest and transparent manner, providing the other part with accurate information in the spirit of the Code’s objectives.
• The agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with regard to its revenue, expenses and profitability. The arrangements should be proportionate and appropriate in light of these factors.
• The parties will assist each other in their dealings with other stakeholders, including government, utilities and financial institutions to achieve outcomes consistent with the Code.
• The parties will take into account that the risk of default is being borne by the landlord and they must not seek to permanently mitigate this risk in negotiating temporary arrangements.
• Leases should be dealt with on a case-by-case basis considering the effects of the COVID-19 pandemic on the tenant’s business, whether the lease has expired or is soon to expire, whether the tenant is in administration or receivership.
• Other factors should also be considered such as leases with different structures, tenure structures, the lease being in a period of holding over, or various mechanisms for determining rent.

The following leasing principles should be applied as soon as reasonably practicable and in the most appropriate manner in light of the specific aspects of the leasing arrangement:

• Landlord must not terminate leases for non-payment of rent during the COVID-19 pandemic period or the reasonable subsequent recovery period.
• Tenants must comply with its obligations under the lease (subject to the amendments made between the parties negotiated in light of the Code). The material failure of the tenant to comply with the substantive terms of the lease will forfeit the protections granted under the Code.
• Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
  • Waiver of rent – a waiver of rent (or part) is essentially rent-free and cannot be recovered by the landlord over the balance of the term of the lease.
    • A rent waiver must constitute the majority (being more than 50%) of the total reduction in rent payable during the COVID-19 pandemic period. This amount should be increased where it affects the tenant’s capacity to fulfil its other obligations under the lease. Tenants can agree to waive the 50% minimum by agreement.
  • Rent deferral – a deferral of rent suspends the obligation to pay rent (or part) to a later date at which point it is equally applied over the balance of the term or the next two (2) years of the lease (whichever is greater).
    • Government Example A: where the tenant’s revenue has fallen by 100%, then at least 50% of the rent for the COVID-19 period is waived and the balance is applied as a rent deferral.
    • Government Example B: where the tenant’s revenue has fallen by 30%, then at least 15% of the rent during the COVID-19 pandemic period is rent-free and the balance (85%) is applied as a rent deferral.
• Where rent is deferred or waived, the landlord should not claim fees, interest or other charges from the tenant.
• Reductions in statutory charges (for example council rates, water rates, land tax) or insurance should be proportionally passed onto the tenant.
• Landlords should share any benefit due to a deferral of loan payments with the tenant in a proportionate manner.
• Landlords should seek to waive recovery for any other expenses or outgoings during the period the tenant is not able to trade. For example, if cleaning services are reduced during the COVID-19 pandemic period, the reduction in those charges should be passed on to the tenant.
• Where the agreements negotiated in light of the Code require repayment of a sum, this should occur over an extended period of time and should not commence until the earlier of the COVID-19 pandemic period ending or the existing lease expiring.
• Landlords must not draw on a tenant’s security for non-payment of rent during the COVID-19 pandemic period and / or a reasonable subsequent recovery period.
• The tenant should be provided with the opportunity to extend its lease for an equivalent period of the rent waiver or deferral to allow the tenant additional time to trade on existing lease terms.
• Rent increases (except for retail leases based on turnover) are frozen for the COVID-19 pandemic period and a reasonable subsequent recovery period. The parties may nonetheless mutually agree that rent will increase under the terms of the lease.
• Landlords may not apply any restrictions, levies or penalties if the tenant reduces its opening hours or ceases to trade during the COVID-19 pandemic.

Where parties cannot reach agreement on leasing arrangements, the matter should be referred to the relevant State or Territory Small Business Commission or Ombudsmen for binding mediation of the arrangement.

Parties must not use the mediation processes available to prolong or frustrate the resolution of the leasing arrangement.

Comments about the Code

Both Tasmania and New South Wales have introduced legislation to allow the Minister to pass regulations that would capture the above leasing principles in the Code. The State and Territory-specific legislation has not yet been released.

The Code appears to provide parties with guidance as to varying leasing arrangements in light of the COVID-19 pandemic. There are some challenges such as navigating leases that are close to expiry and those leases that will expire prior to the end of the two (2) year rent deferral repayment period.

For tenants that are not eligible for the JobKeeper Program or have a turnover more than $50 million, the Code will not apply. In these instances, the Government has left it up to these larger landlords and tenants to negotiate arrangements outside of the Code. Parties will no doubt seek to apply those favourable principles under the Code in their negotiations.

It will be interesting to see how the State and Territory legislation defines the turnover limit (of $50 million) and the time period applied to calculate this threshold.

Where to from here?

Whilst we wait for the State and Territory governments to incorporate the Code into its legislation, parties may wish to enter into negotiations in light of the above principles.

Tenants must be sure to provide correct information that relates to turnover and the effect of COVID-19 so as to comply with the overarching principles of the Code.

Parties should seek legal advice in relation to the application and principles of the Code.

Landlords and tenants should also take care to document clear arrangements between the parties to avoid later disputes.