Commercial Lease Regulations – Mitigating the effects of COVID-19 for affected leases.
As a result of public health directions in response to COVID-19, many businesses have either experienced a large loss in profits or have been forced to change its daily operation. Practically, this affected many businesses in being able to meet its leasing obligations.
In responding to this, on 7 April 2020, the National cabinet released the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (‘National Code’). This was done in an effort to provide overarching principles relating to retail and commercial leasing. These codes were to be given effect through State legislation or regulation.
On 28 May 2020, the Queensland Government in exercising its emergency power under section 23 of the COVID-19 Emergency Response Act 2020 (Qld) gave effect to these principles. The Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) (‘Regulation’) was subsequently passed. Apart from giving effect to the leasing principles under the National Code, the regulation also seeks to mitigate the effects of the COVID-19 emergency for affected leases. It additionally seeks to establish proceedings for resolving relevant leasing disputes.
The key principles from the recent Regulation are to be discussed in this article.
LEASES AFFECTED BY THE REGULATION
The Regulation primarily governs an affected lease in accordance with the provided definition. A lease will be considered an affected lease if the following conditions are met:
- the lease is a retail shop lease, or a lease carrying on business; and
- the lease is binding on the tenant as at 28 May 2020 (whether or not it has commenced); and
- the tenant is a Small-Medium Enterprise (‘SME’) entity (which is generally an entity with less than $50 million turnover); and
- the tenant is eligible for the JobKeeper Payment scheme.
If these conditions are met, the lease will be considered an affected lease and will be subject to the Regulation.
Note that farming, agricultural and pastoral leases are generally excluded from Regulation and are not an affected lease.
PROTECTIONS AND RESTRICTIONS UNDER THE REGULATION
The regulation provides restrictions for landlords whilst offering protection for tenants.
If any of the following circumstances are present:
- where there’s been a failure to pay rent for a period occurring (wholly or partially) during the response period; or
- where there has been a failure to pay outgoings for a period occurring (wholly or partially) during the response period; or
- where the business carried on at the premises is not being opened for business during the response period according to the lease’s terms;
landlords are prevented from taking prescribed actions under the lease. Prescribed actions include:
- recovery of possession;
- termination of the lease;
- eviction of the tenant;
- exercising a right of re-entry to premises;
- seizure of any property, including for the purpose of securing payment of rent;
- the payment of interest on, or a fee or charge relating to, unpaid rent or outgoings;
- a claim on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings;
- the performance of an obligation by the tenant or another person under a guarantee under the lease;
- exercising or enforcing another right by the landlord under the lease or other agreement relating to the leased premises.
When can action still be taken?
Landlords may still exercise the prescribed actions under a few circumstances:
- (a) where having renegotiated the terms of the lease, both parties have agreed to vary the agreement in order to either:
- reduce rent; or
- provide conditions which relate to the reduction;
- (b) where it is in accordance with the settlement agreement entered into between the parties regarding:
- Failure to pay rent in the response period;
- Failure to pay outgoings in the response period; or
- The business not being opened according to the lease’s terms in the response period;
- (c) where the action is in accordance with the direction of a court or tribunal; and
- (d) where the tenant has failed substantially to fulfil their obligations in compulsory negotiation. Landlords are required to make a genuine attempt to renegotiate payable rent or other lease conditions.
Can tenants restrain landlords from taking prescribed actions?
If the landlord is persisting on taking prescribed actions, tenants may apply to QCAT or to the court to restrain the landlord’s action.
A tenant or landlord under an affected lease may request renegotiation regarding the rent or other terms of the lease. This request must be done in writing.
Once the request has been made, the parties must as soon as practicable provide information relevant to the request. Such information must be:
- accurate, correct, and not misleading;
- sufficient for fair and transparent negotiation between the tenant and landlord. What amounts to sufficient information may include:
- a clear statement of terms that are being sought to negotiate; and/or
- a statement as to why lease is an affected lease – this must be accompanied by supporting documents such as:
- Accurate financial documents (eg. regarding turnover);
- Documents showing that the tenant is an SME;
- Documents evidencing the tenant’s eligibility or participation with JobKeeper payments;
- Evidence of steps taken to mitigate effects of COVID-19 emergency on tenant’s business.
Once these documents have been provided, the landlord must make an offer within 30 days after sufficient information has been provided.
The offer must be in relation to any or all of the rent payable within the response period. It must further provide no less than a 50% reduction in rent in the form of a waiver of rent.
When making the offer, the landlord is obliged under the Regulation to take a variety of considerations into account when making an offer. Such considerations include:
- the circumstances of the tenant and the affected lease – including the reduction in turnover; and
- the extent that failure to reduce rent would affect the tenant’s ability to comply with obligations under the lease; and
- the landlord’s own financial position – including any financial relief that has been provided as part of the COVID-19 response measure; and
- whether any portion of the rent represent land tax, local government rates, statutory charges, insurance premiums or other outgoings which the landlord has received a reduction.
Note that the landlord must not increase the tenant’s rent during the response period unless the calculation of rent is based on the business’ turnover.
Once the tenant has received the offer, the parties can document the agreement through a variation agreement or any other agreement.
Does the lease have to be extended?
As a general rule, where an affected lease has been waived or deferred, the landlord must offer the tenant an extension to the terms of the lease on the same conditions as those contained in the lease. The extension must be equivalent to the period for which rent is waived or deferred.
An exception however may apply if:
- the landlord has a legal obligation to a third party – the landlord does not have to extend the lease to the extent necessary to comply with that obligation; or
- landlord intends to use premises for own commercial purpose.
What obligations do parties have in negotiation?
As a general rule, parties in negotiation are required to cooperate, act reasonably, and act in good faith when discussing or taking actions related to mitigating the effects of the COVID-19 emergency; or other matters such as:
- Renegotiating rent;
- Renegotiating conditions of the lease;
- Exchanging information relevant to those negotiations;
- Extending the terms of the lease;
- Reducing services at the premises etc.
Are there additional obligations regarding rent deferral?
Where rent has been deferred under the new variation agreement, parties are subject to following obligations:
- parties must not require payment of the deferred rent until the end of the response period;
- parties must require payment of the deferred rent to be amortized, using a method agreed; between the parties, over a period of at least 2 years but no more than 3 years; and
- parties must not require the tenant to pay interest or any other fee or charge in relation to an amount of deferred rent unless the tenant fails to comply with conditions which rent deferred.
Can the security deposit be retained under a deferred rent arrangement?
Any security deposit given to the Landlord may continue to be held by the Landlord until full payment of the deferred rent has been paid.
Can parties renegotiate if circumstances change?
After the initial negotiations, if the rent agreement was reached and the circumstances forming the agreement changed materially, subsequent rent negotiations may be conducted. For example this may occur where the reduction of turnover changes substantially which further reduces the tenant’s capacity to pay rent.
The rules of this negotiation are the same as the initial negotiation – including requirements to act in good faith and provide supporting documents etc.
Throughout the negotiation, parties are subject to confidentiality obligations under the Regulation. Parties cannot disclose protected information obtained from the negotiation.
Protected information includes:
- Personal information – meaning name, address and contact details of individual of persons other than the landlord or tenant; and
- Other information relating to:
- Business processes; or
- Financial information – including information about the trade of a business
However, under the following circumstances, protected information may be disclosed:
(a) with consent of person whom information relates; or
(b) where information is given to professional adviser or financier who agree to keep it confidential; or
(c) where the information has already been disclosed to the public – parties can only disclose to extent already disclosed; or
(d) where the small business commissioner authorises the disclosure; or
(e) where the disclosure is in accordance with the law
Breach of the confidentiality obligations under the Regulation may attract a maximum penalty of 20 penalty units – equivalent to $2,669.
FAILURE TO AGREE
If the parties have attempted to resolve disputes, however cannot reach an agreement, parties may issue a dispute notice to the Small Business Commissioner (‘commissioner’). The commissioner has the discretion to accept or reject the notice.
The commissioner may reject the notice if:
- it does not relate to eligible lease dispute
- it is frivolous or vexatious
- has not been given in good faith
If the notice has been accepted, the commissioner will arrange for mediation.
If after 30 days of giving dispute notice, and the dispute has not been resolved, parties may apply to QCAT or the court.
Written by James Tan and Ervin Hii (Student Placement)