Commercial landlords and tenants are navigating through increasingly complex and uncertain times as they attempt to grapple with the National Cabinet’s Mandatory Code of Conduct (the National Code) for specific leasing arrangements on commercial tenancies. We answer the top 10 questions asked by our clients about the practical application of the National Code. The National Code The National Cabinet announced on 7 April 2020 that all existing commercial leases (including retail, office and industrial leases) would be subject to the National Code. This sets out good faith leasing principles to guide discussions between commercial landlords and tenants who are significantly affected by the COVID-19 pandemic. The National Code applies to tenants who are JobKeeper participants and small or medium-sized enterprises with an annual turnover of less than $50 million. Top 10 Q&A for commercial landlords and tenants 1. Does the National Code apply to all commercial tenants? No. The National Code does not apply to commercial leases that do not meet the eligibility criteria nor to leases if the tenant is not suffering financial distress as a result of the COVID-19 pandemic. However, the National Code states it should apply ‘in spirit’ to all leasing arrangements, having fair regard to the size and financial structure of those businesses. Landlords should consider the principles of the National Code when dealing with tenants. 2. How does the principle of proportionality work in practice? The National Code requires landlords and tenants to share the financial risk and cash flow impact in a proportionate, measured manner during the COVID-19 pandemic period. For example, if a commercial tenant with rent of $10,000 per month proves a reduction in turnover of 60%: The rent payable by the tenant will reduce to 40% of the previously agreed rent ($4,000) during the pandemic period At least 50% of that reduction ($3,000) must be waived by the landlord, and Unless otherwise agreed by the parties, the remaining $3,000 will be deemed deferred rent and payable by the tenant in the post pandemic period or on expiry of the lease (whichever is earlier) over the balance of the lease term or over 24 months (whichever is greater). 3. How is a tenant’s turnover determined? Turnover is defined by reference to assessments undertaken for a tenant’s eligibility for the Australian Government’s JobKeeper program. It is determined by the commercial activities of the tenant, including all taxable supplies and all GST-free supplies, but not input taxed supplies. This includes all revenue streams of the tenant and any affiliated or subsidiary company (domestic or global). 4. Can a landlord request information to prove a tenant’s claimed loss of turnover? Yes. The National Code requires landlords and tenants to provide sufficient and accurate information throughout rental negotiations. The National Code defines this to include information generated from an accounting system, and information provided to and/or received from a financial institution. Landlords can request reasonable information to assist in their determination of a tenant’s decrease in turnover. Landlords should carefully consider the requirements of the National Code to ensure privacy principles are not breached when requesting certain documents. 5. Should rental arrangements be documented? Yes. It is prudent for landlords and tenants to document any temporary rental arrangements for the COVID-19 pandemic period. Agreements should be signed by both parties. In some instances, landlords and tenants may consider registering formal variations of the lease terms. 6. Does the National Code apply to both new and existing leases? Yes. The National Code applies to all commercial leases entered into during the pandemic period, as well as all existing leasing arrangements entered into before the National Code commenced. Commercial landlords and tenants should ensure any prior or subsequent rental arrangements conform to the principles of the National Code for the duration of the pandemic and any reasonable subsequent recovery period. 7. Is a landlord required to pass on any financial or statutory savings to a tenant? Yes. Landlords must pass on any reduction in statutory charges (e.g. land tax, council rates) or insurance to tenants on a proportionate basis. This principle also applies to financial savings if landlords benefit from loan repayment deferrals. Landlords must also consider waiving outgoings payable by tenants if a tenant has ceased trading due to the pandemic. If tenants are still able to trade, landlords should consider reducing the amount of outgoings payable by an amount that is proportionate to the tenant’s decreased turnover. 8. Can a landlord terminate a lease for a tenant’s default if unrelated to the non-payment of rent? Yes. The National Code only prohibits termination of a lease for non-payment of rent. If a tenant’s default is unrelated to the non-payment of rent, a landlord may reserve and exercise their termination rights under a commercial lease. However, landlords should consider the principles of the National Code when reserving or exercising these contractual termination rights. 9. Can a landlord draw on lease securities for a tenant’s default if unrelated to the non-payment of rent? Yes. The National Code only prohibits landlords drawing on a tenant’s lease security to remedy a default if that default relates to the non-payment of rent. If a tenant’s default is for reasons other than the non-payment of rent, a landlord may reserve or exercise their contractual default rights. 10. Can a landlord increase rent in accordance with the terms of a commercial lease where a tenant is not eligible for protection under the National Code? Yes. If the National Code does not apply to a commercial lease, a landlord is permitted to increase the rent payable by a tenant in accordance with the terms of the lease. However, landlords should consider the principles of the National Code when deciding whether or not to increase rent and particular attention should be drawn to the size and financial structure of those tenants. What’s next? This Q&A is published subject to the enactment of the National Code by the various states and territories, which may modify or create some inconsistencies across the jurisdictions. We are closely monitoring the progress of the states and territories as they commence legislating the National Code. The above content is commentary rather than legal advice and was prepared on the basis of applicable legislation, government programs and initiatives that were in place as of the date of publication. Given the ongoing evolution of both the COVID-19 pandemic and frequent consequential changes to the various laws and programs within all Australian states and territories, readers should seek legal advice on the current situation as applicable to their specific circumstances before taking any action in relation to the above.
