Business guide to Coronavirus

Commercial leasing principles explained

Prime Minister Scott Morrison recently released the ‘National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19’ designed to address commercial leasing matters during the coronavirus crisis.

The purpose of the code is to create a set of good faith leasing principles for commercial tenancies (including retail, office and industrial tenancies). Landlords and tenants are to use the principles fairly in negotiating amendments to existing leasing arrangements.  

The code will complement, not supersede, relevant state and territory legislation and will be set out in the regulations each jurisdiction creates in adopting the code. The code will come into effect after 3 April 2020, dependent upon when it is legislated by each state territory and will run for as long as the federal JobKeeper program remains operational (currently for at least the next six months). 

Eligibility and qualification to access the code  

The code will exclude residential and large commercial tenants and will to apply to tenant businesses with a turnover of less than $50 million and which are eligible for the federal JobKeeper program, which means the business must: 

  • have a turnover of less than $50 million, and 
  • have (already) evidenced more than 30% reduction in its turnover as a result of COVID-19. 

In the case of franchises, the $50 million threshold will apply to the franchisee. With respect to corporate retail groups, the threshold will apply at the group level. 

The Mandatory Code of Conduct in a nutshell 

The code provides a framework to encourage landlords and tenants negatively affected by the COVID-19 crisis to resolve tenancy disputes using the code principles. If a resolution cannot be reached, the appropriate state or territory-based retail/commercial leasing dispute resolution processes will be followed.  

Principles of the code

Landlords: 

  • must not terminate leases for non-payment of rent and should seek to waive other expenses or outgoings payable by a tenant during any period that the tenant is unable to trade. 
  • must offer tenants a proportionate reduction in rent of up to 100% of what is usually payable, through a waiver or deferral, on a case-by-case basis and based on the tenant’s proportionate reduction in trade as a result of the COVID-19 pandemic, plus a subsequent reasonable recovery period. 
  • must pass on to the tenant any reductions in statutory rates and charges and/or insurance(s), where applicable. 
  • must share with the tenant any benefit received due to deferred loan repayments provided by a financial institution. 
  • must not draw on a tenant’s bank guarantee or other security for non-payment of rent. 
  • must not apply any fees, interest or charges to rent waived and/or deferrals of rent. 
  • must allow tenants to reduce opening hours or cease to trade because of the COVID-19 pandemic without issuing any penalties or levies. 
  • agree to a freeze on rent increases (except for retail leases based on turnover rent). 

Tenants: 

  • must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the code. 
  • must continue to comply with all provisions of their lease, otherwise their rights to protection under the code may be forfeited. 

should be given an opportunity to extend their leases for a period equivalent to the period of any rent waiver or deferral.  

The code requires that any rental waiver must be for no less than 50% of the total reduction in rent. If the tenant requires more than 50%, the landlord’s financial ability to provide any such waiver must be taken into consideration, and the tenant may waive this requirement. 

Deferred rent must be payable over the balance of the lease term or for a period of no less than 24 months, whichever is the greater, unless otherwise agreed. Repayment is to commence from the end of the COVID-19 pandemic or expiry of the lease plus a reasonable subsequent recovery period. 

It is important to note this information does not represent legal advice and you should seek specific legal advice for your circumstances. We recommend Australian Business Lawyers & Advisors to help find solutions and minimise risk on your workplace. 

Jane Wolfe

Associate Director, Australian Business Lawyers & Advisors

Jane is a senior lawyer practising in commercial property and business law. Her practice includes: commercial, industrial and retail leasing, commercial property sales and acquisitions, owners corporation and strata law, property due diligence and property financing.

Free webinar: Tenancy Relief Packages Q&A

Legal experts from Australian Business Lawyers & Advisors will provide an analysis of the current state of play for the Tenancy Relief Packages following the announcement of the mandatory Code of Conduct by the National Cabinet. They will also answer your questions on the latest developments and forecasts.