Commercial leases: the national COVID-19 response

29 July 2020

The Code

In response to the COVID-19 pandemic, the National Cabinet released its Mandatory Code of Conduct (the Code) in April 2020 to impose a set of good faith leasing principles between parties of commercial tenancies. The Code states that it will apply to those tenants that:

  1. Have a turnover of less than $50million;
  2. Have a 30% or greater loss in revenue; and
  3. Are participants of the JobKeeper program.

The objectives of the Code are to ensure that landlords and tenants act in an open, honest and transparent manner to negotiate temporary leasing arrangements by considering the tenant’s particular circumstances with relief measures to be proportionate to the financial impact experienced by the tenant.

The response

The National Cabinet intended that the Code would apply for the period during which the JobKeeper program remains operational, which is particularly important to note given the Federal Government’s recent announcement to extend the JobKeeper program.

Since its announcement, the Code has been adopted in different ways by most states and territories across Australia through the enactment of legislation tailored by each jurisdiction. In the NT, the Tenancies Legislation Amendment Act 2020 was enacted to amend the Business Tenancies Fair Dealings Act 2003 to give the relevant Minister specific powers during an ’emergency period’. This came into effect on 24 April 2020 and allows the Minister broad powers to issue declarations by gazette notice. Interestingly the NT legislative response does not adopt the terms or measures of the Code in any way. All other states besides Queensland have expressly adopted the Code in some way. The focus in the NT legislative response is for landlords and tenants to undertake mandatory ‘good faith negotiations’ before any notice to quit can take effect.

Comparison

The legislation varies from state to state in the way it governs the relationship between commercial landlords and tenants in response to the pandemic. For instance:

  • Duration: While some states prescribe fixed timeframes (for example in effect until the end of September for Victoria, SA, WA and Qld) others tie the duration of its legislative response to the pandemic itself (for example, NT legislation applies while the COVID-19 Declaration of Public Health Emergency remains in force);
  • Type of Lease: For almost all jurisdictions, the new legislation is limited to small commercial leases (eg retail shop leases), whereas in the NT, the legislation applies simply to any leasing arrangement with a business purpose;
  • Tenant Eligibility: Almost all jurisdictions have limited the benefit of their legislation to “impacted tenants” tying their eligibility with the JobKeeper eligibility criteria. However no such eligibility requirement applies in the NT;
  • Threshold Eligibility: All jurisdictions, other than the NT, have imposed the $50million turnover test on the tenant.
  • Rent: All jurisdictions, other than NT and ACT, have imposed restrictions on rent increases during the prescribed period; and
  • Breach of Lease: In the event that the tenant breaches the lease during the period on grounds not related to the economic impact of the COVID-19 pandemic (eg. damage to property), most jurisdictions do not prevent the landlord taking action against the tenant. On the other hand, VIC and ACT place some restrictions on landlords and to varying extents preclude breach enforcement if the tenant has requested rent relief or unless the parties have first engaged in good faith negotiations.

Going forward

Tenants and landlords alike will need to consider their leases and circumstances carefully to determine whether their lease falls within the scope of the relevant legislation in their state or territory and accordingly consider the obligations imposed in respect of negotiating a temporary change to rental conditions. In the NT there is a lack of specific measures such as fixed rent deferral and waiver limits or eligibility criteria, instead parties will need to come to the table to negotiate. Any agreed changes should be formalised by way of a side deed of variation to lease as appropriate and executed by all parties (including any guarantors of the lease). HWL Ebsworth can provide support and specialised advice in relation to these measures and other widespread ramifications of the COVID-19 pandemic to landlords, tenants and managing agents.

This article was written by Nadia D’Souza, Senior Associate.

Subscribe to HWL Ebsworth Publications

HWL Ebsworth regularly publishes articles and newsletters to keep our clients up to date on the latest legal developments and what this means for your business.

To receive these updates via email, please complete the subscription form and indicate which areas of law you would like to receive information on.

Contact us