COVID-19 - New Regulation for Commercial Leases in Queensland.
On 28 May the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 was passed to mitigate the effects of the COVID-19 emergency on tenants and landlords and to establish a process for resolving tenancy disputes.
This Regulation generally gives effect to the National Cabinet Mandatory Code of Conduct. Unlike the Code of Conduct which provided that tenants could negotiate rent relief for the pandemic period plus a reasonable recovery time, the Regulation effectively offers relief during the Response Period being 29 March 2020 to 30 September 2020.
Below is an outline of the Regulation:-
Who is eligible and what does the Regulation apply to?
The Regulation applies to Affected Leases where:
- The lease is either a Retail Shop Lease or a lease where the premises is predominantly used for carrying on a business;
- The lease or an agreement to lease was binding on the tenant on 29 March 2020; and
- The tenant is an SME tenant, that is:
- Has an annual turnover or is likely to have an annual turnover of less than$50m (this includes turnover of connected or affiliated entities); and
- It, or a connected or affiliated entity, is eligible for the JobKeeper Scheme.
Where the Regulation applies to a sublease between a franchisor and its franchisee, then the lease between the franchisor and the landlord will be an Affected Lease under the Regulation.
Restrictions on landlords
Under the Regulation, landlords must not increase rent during the Response Period. While landlords can still review rent under their leases, they cannot give effect to a rent increase until the Response Period is over. An exception to both of these restrictions is where rent is based on the turnover of the tenant.
Landlords are also prohibited from taking Prescribed Action in relation to an Affected Lease. This means that landlords generally cannot take action or commence proceedings relating to their tenant failing to pay rent or outgoings, or their tenant not being open for business during the required hours under the lease. Tenants will not obtain the benefit of these protections where:
- The landlord genuinely attempts to negotiate the conditions of the lease and the tenant does not comply with their obligations under the Regulation;
- Their reasons are not related to the COVID-19 emergency; or
- The landlord is enforcing a court order or a variation of the terms of the lease as negotiated under the Regulation.
Negotiations between tenants and landlords
While tenants and landlords are still free to reach alternative arrangements, the Regulation provides a basis for negotiating the terms of leases during the Response Period. A party to an Affected Lease may request the other party negotiate in writing regarding the terms of the lease, and the parties must act reasonably and in good faith during the course of negotiations. After a request is made to commence negotiations, the landlord and tenant must then exchange relevant information as soon as practicable, and within 30 days of receiving sufficient information the landlord must offer their tenant a reduction in rent payable and confirmation of any other proposed changes to the lease terms. This offer by the landlord must:
- Relate to rent payable during the Response Period; and
- Provide for no less than 50% of the rent reduction to be in the form of a waiver of rent.
While the Regulation does not specifically provide that rent relief must be proportionate to a tenant’s reduction in turnover, landlords must have regard to the various matters set out in the Regulation when deciding on an offer. Confidentiality provisions also work to protect information disclosed throughout the course of negotiations.
If the parties agree to a reduction of rent and a ground on which the agreement is based later changes in a material way, then a party to an Affected Lease can request further negotiations during the Response Period.
The same obligations apply as above during these subsequent negotiations; however, the landlord will not be required to provide at least 50% of the rent reduction as a waiver.
Where rent is deferred
Where the parties to an Affected Lease agree to defer payment of rent, the variation of lease or agreement must:
- Not require payment of the deferred rent to commence until the day after the end of the Response Period;
- Require payment of the deferred rent to be paid over a period of at least 2 years but no more than 3 years, using an agreed method;
- Provide that the landlord cannot require the tenant to pay interest or any other fee or charge in relation to the deferred amount, unless the tenant fails to comply with the agreed conditions on which the rent is deferred.
The landlord may continue to hold the security deposit under the lease until the tenant has paid the full deferred amount, even once the lease has ended. This means that landlords may wish to require additional security or extended expiry dates of security held under the lease, and the terms of security such as bank guarantees should be reviewed.
Extending the lease
Where there has been an agreement to defer or waive payment of rent, the Regulation stipulates that landlords must offer their tenants an extension of the lease equivalent to the period of the waiver or deferral. Any extension must also be on the same conditions as those already contained in the lease (other than the rent amount payable).
Exceptions to this include:
- Where the landlord intends to use the premises for a commercial purpose and therefore cannot extend the term of the lease; and
- Where the landlord has an existing legal obligation that is inconsistent with the obligation to extend the term of the lease.
Services to the premises
If a tenant is unable to use the premises for the operation of their business due to COVID-19, the landlord may reasonably reduce or cease services. Any reduction or cessation should be subject to any reasonable request by the tenant.
The dispute resolution provisions of the Regulation apply even where the dispute provisions under a lease have not first been complied with. The provisions also apply to disputes arising from Affected Leases which are otherwise regulated by the Retail Shop Leases Act 1994.
Under the Regulation, parties must first attempt to resolve disputes between themselves, and in doing so must cooperate and act reasonably and in good faith. If the dispute cannot be resolved, a party may then give notice of the dispute to the Small Business Commissioner (“the Commissioner”) in the approved form. The Commissioner will then either dismiss the dispute notice or accept it and:
- Nominate (and pay for) a mediator; and
- Give written notice to the parties of the mediator nominated, and the time and date of the mediation conference.
While the mediation conference must be at least 7 days after notice of the dispute, within 2 days following notice of the date of the mediation conference a party may request the date be pushed back by up to a further 7 days.
Mediation conferences can be held via telephone or videoconference if the parties agree, and legal representation is only allowed where the approval of the mediator is obtained. Submissions made during a mediation conference are expressly stated under the Regulation to not be admissible in court proceedings.
Any agreements reached at the mediation conference must be recorded in writing.
Where the parties do not reach a settlement agreement during mediation, the parties may then decide whether they wish to take the dispute further. This can include making an application to QCAT, commencing court proceedings, or arbitration under the Retail Shop Leases Act 1994.
If you require advice or assistance with your commercial property matter, contact the team at Miller Sockhill Lawyers on 07 5444 4750 and one of our friendly team members can answer any questions you might have.