The Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (the Regulation) came into effect on 28 May 2020. This Regulation implements the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles during COVID-19 (the Code). The main purposes of this regulation are to:
mitigate the effects of COVID-19 on small business tenants and landlords under affected leases;
establish a process for resolving lease disputes.
Application & Commencement
The Regulation applies to affected retail and commercial leases, will apply retrospectively from 29 March 2020 and will expire on 31 December 2020.
General Obligations
The Regulation imposes various obligations on landlords and tenants to reflect the principles of the Code, which will apply for the period starting on 29 March 2020 and ending on 30 September 2020 (Response Period). These general obligations include:
Landlords and tenants must cooperate and act reasonably in good faith;
A landlord must not take prescribed action on any of the following grounds:
a failure to pay rent and/or outgoings during the response period; or
the business operating at the premises not being open for business during the hours contemplated by the lease.
3. A landlord must not increase the rent payable by the tenant throughout the response period. The landlord may review the rent as contemplated by the lease but it must not give effect to the increase in rent until after the response period ends. The landlord must also not take any prescribed action after the response period where the tenant fails to pay the amount equivalent to the increase in rent.
Prescribed action
The prescribed action that a landlord is prohibited from taking during the response period includes but is not limited to the following:
recovery of possession;
termination of the lease;
eviction of the tenant;
exercising a right of re-entry to premises;
requiring the payment of interest on unpaid rent or outgoings;
making a claim on a bank guarantee or security deposit for unpaid rent and/or outgoings;
requiring the performance of an obligation by the tenant or another person under a guarantee; and
exercising or enforcing any other right under the lease.
Notwithstanding the above, the landlord is not prevented from taking a prescribed action:
where a variation to the lease or settlement agreement made pursuant to the Regulation permits such action;
where the tenant, despite a genuine attempt from the landlord to renegotiate the rent, substantially fails to renegotiate the rent and act in accordance with the Regulation (for example, fails to act reasonably and in good faith or fails to provide sufficient information); or
on a ground that is unrelated to the impacts of the COVID-19 pandemic.
Tenant Compliance
Tenants are still required to comply with the terms of the lease, where possible. The protections under the Regulation only apply to the tenant’s obligation to pay rent, outgoings and keep the business open and operating and so do not apply to tenants that fail to comply with other substantive terms of the lease. Despite this, the tenant is not taken to be in breach of the lease for any act or omission that occurs after 23 April 2020 that is required under a Covid-19 response measure or a law of the Commonwealth or State.
Negotiations
Phase 1: Request
The initiator (either tenant or landlord) writes to the other party requesting to negotiate an affected lease under the regulation.
Phase 2: Share sufficient information
The tenant and landlord share sufficient information that allows both parties to negotiate in a fair and transparent way.
Phase 3: Offer
Once sufficient information is received, the landlord must respond to the tenant by offering a proportionate rent reduction and any other proposed changes to lease conditions.
Phase 4: Negotiate
After receiving the offer from the landlord, the tenant and landlord can continue to negotiate the rent reduction and other changes to lease conditions. Both parties must cooperate and act reasonably and in good faith when negotiating.
Phase 5: Agreement
If agreement is reached, document what has been agreed to in writing as a variation to the lease or another agreement. If agreement can't be reached, either party may give notice of an eligible lease dispute (a dispute notice) to the Queensland Small Business Commissioner.
Waiver and Deferral of Rent
A tenant must sufficiently demonstrate their business has experienced a loss of turnover for their landlord to offer a proportionate rent reduction. This should be calculated in line with the JobKeeper turnover test.
At least 50% of the rent reduction offered by a landlord must represent a waiver, leaving the rest to be a deferral paid as instalments after 30 September 2020.
The landlord can also take their own financial position into account when offering a rent reduction.
Rent reductions for affected leases must be for all or any part of the rent due for the duration of the Response Period.
Legally, both the tenant and landlord must cooperate and act reasonably in all discussions and actions associated with COVID-19 related lease arrangements.
The landlord must respond with an offer to the tenant within 30 days of receiving sufficient information to consider the request.
Once an agreement is reached, you must record the terms of the rent reduction, and any other conditions, in writing in a variation to the lease agreement or another agreement.
Repayment Obligations
Deferred rental payments must be repaid no earlier than 1 October 2020 and over a period between 2 and 3 years. This means a tenant may continue to repay the deferred rent after the expiration of the lease if there is less than 2 years remaining on the term. For example, if the tenant has 3 months remaining on the term, the tenant will still be granted a minimum 2 year period commencing 1 October 2020 to repay the deferred rent in equal monthly amounts. The landlord may hold security provided under the lease until the deferred rent is repaid, regardless of whether the lease has expired. Any rent waived is not to be repaid.
Demonstrating Financial Impact
Tenants and landlords must exchange enough information to understand the impact of COVID-19 on each other to enable fair and transparent negotiations. Information shared must be true and accurate, and sufficient to inform the negotiations.
For a Tenant, this may include:
a statement explaining why the lease is an affected lease;
accurate financial information or statements about turnover;
extractions from an accounting system or lodged business activity statement (BAS) or tax returns;
information provided to a financial institution;
expenses that have substantially increased (or have been deferred, waived or suspended) due to COVID-19;
evidence showing the tenant is a small to medium enterprise (SME) (i.e. that the tenant's turnover did not exceed $50 million in the 2018–19 financial year, or is unlikely to exceed that amount in the 2019–20 financial year);
evidence the tenant is eligible for the JobKeeper Payment scheme;
information about what steps the tenant has taken to alleviate the financial impact of COVID-19
summary of government financial assistance sought and the outcome (including land tax relief for landlords);
material provided by a government agency in relation to financial assistance package availability, eligibility or acceptance.
Dispute Resolution
The Regulation provides for a comprehensive dispute resolution process.
Before commencing mediation, the parties must attempt to resolve the dispute and must cooperate and act reasonably in good faith. If a resolution is not reached, then a party may give notice of the dispute to the Small Business Commissioner.
On receiving a notice of the dispute, the Small Business Commissioner must nominate a mediator and the date for a mediation conference must be at least seven days after the notice is given. At a mediation conference, a party is permitted to be represented by an agent or in the case of a corporation, an officer or employee of the corporation. A party may be represented by a lawyer only with the approval of the mediator and only in certain circumstances.
In the event that the dispute is not resolved during mediation, then an application may be made by either party to QCAT for an order to resolve the dispute.
Summary
The Regulation has the potential to mitigate the impact of the pandemic and ensure the survival of landlords and tenants however, the onus is now on the parties to affected leases to adopt its provisions with a view of reaching a mutually beneficial outcome.
Written by Righardt Allers
This publication is provided as general information only and should not be considered or relied upon as legal advice. The law is complex and you should always obtain specific legal advice about your circumstances from a qualified legal practitioner.