On 28 May 2020, Queensland Parliament passed the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (the “Regulation”) with the stated intention of giving effect to the principles set out in the National Cabinet Mandatory Code of Conduct (the “National Code”).
The Regulation is aimed at supporting both commercial landlords and tenants during the COVID-19 pandemic through providing guidelines for negotiation and placing limits on certain lease enforcement steps.
Commercial landlords and tenants have keenly awaited this Regulation.
- The Regulation applies retrospectively and runs from 29 March 2020 to 30 September 2020 (the “Response Period”);
- The Regulation applies to an “Affected Lease” (see below);
- There are general obligations on landlords and tenants to act reasonably and in good faith;
- Either party can request a negotiation of the Affected Lease regarding rent and other conditions, which commences a process (per Division 3 of the Regulation);
- If Rent is waived or deferred, the landlord must offer an extension of the lease term;
- Within 2 to 3 years of the Response Period ending, the deferred rent must be paid back;
- During the Response Period the Landlord is unable to increase rent.
What is an “Affected Lease”?
The definition is fairly broad and will cover many commercial leases. An Affected Lease is defined at Section 5:
- A retail shop lease OR a lease under which the leased premises is wholly or predominantly used for carrying on a business;
- At 28 May 2020, the lease was binding on the tenant (even if the lease had not commenced);
- The tenant is an “SME Entity” (broadly defined – an entity carrying on business with less than $50 million annual turnover, with not-for-profit equivalents etc.); and
- The tenant* is eligible for the JobKeeper Program (*with expansive exceptions).
Restriction on landlord’s enforcement action
During the 29/03/2020 – 30/09/2020 “Response Period” the landlord is prevented from taking any “Prescribed Action”. Prescribed Action includes:
- Recovering possession of the premises;
- Terminating the lease;
- Re-entry into the property;
- Requiring interest be paid on unpaid rent and/or outgoings;
- Claiming on a bank guarantee or security deposit; and
- Enforcing any other right under the lease.
- A landlord is not restricted from taking Prescribed Action where:
- “in accordance with” a lease variation or settlement agreement under Division 3;
- the tenant fails to renegotiate the terms of the lease (for example, not acting in good faith), despite attempts from the landlord to reach an agreement; or
- grounds are not related to the COVID-19 pandemic.
Rent increases suspended until 1 October 2020
A landlord of an Affected Lease cannot increase the rent payable by the tenant during the Response Period (and any scheduled increases do not take effect until 1 October 2020). However, once the Response Period ends, a rent increase can take effect non-retrospectively.
The process for negotiating rent and other conditions – Division 3
Either party (the “Initiator”) to an Affected Lease can request negotiation of the rent “and other stated conditions”. If this occurs:
- As soon as practicable after the Initiator’s negotiation request, true and accurate information must be exchanged.
- 30 days after receiving the information, the landlord must offer the tenant a rent reduction (and any other proposed changes to stated conditions) which must:
- Relate to rent payable during the Response Period;
- Provide that at least 50% of the offered rent reduction is a waiver;
- Have regard to:
- all the circumstances of the tenant (including their turnover during the Response Period);
- whether failing to reduce rent would compromise the tenant’s ability to meet obligation;
- the landlord’s financial position (including financial relief received); and
- upstream reduction in land tax, rates and other outgoings.
[PLEASE NOTE: There is no express requirement for the rent reduction to be proportionate to the tenant’s annual turnover reduction during the Response Period.]
- Once an offer is made, parties must negotiate reasonably and in good faith.
- If an agreement is reached, this should be documented through either:
- Variation of the lease; or
- any other agreement that gives effect to the amended terms.
Re-negotiating a COVID-19 deal?
If circumstances change in a material way (for example the tenant’s income decreases further), either party may request to negotiate a further reduction in rent. However, any further reduction of rent does not need to include a 50% waiver. IMPORTANT: The Regulation does not limit parties negotiating an increase in rent if circumstances are appropriate.
How are deferred rent repayments implemented?
Following the Response Period ending, any deferred rent must be paid over a period of at least 2 years and no more than 3 years. No interest, fees or charges with be payable for the deferred rent, unless the tenant fails to meet conditions of the deferred rent repayments. Landlords can continue to hold any security deposit or bank guarantee until the deferred rent is repaid. If the lease period ends and there is unpaid rent, Landlords can call on the security deposit or bank guarantee in order to meet repayments of the deferred rent.
Is an extension of the lease term required?
Yes – If there is a rent waiver or deferral period between the parties, the landlord must offer the tenant an extension of the lease period to a period equivalent to the deferral or waiver period.
There are exceptions where the landlord is subject to competing commercial obligations.
Can the lessor reduce services provided?
Yes – If the tenant is unable to operate during the Response Period, the landlord can cease or reduce services to the premises that are reasonable in the circumstances and subject to requests by the tenant.
What if an agreement cannot be reached?
Parties must try to resolve the dispute cooperatively and in good faith prior to commencing mediation. If agreement does not occur, parties can give notice to the Small Business Commissioner who can either accept or dismiss the dispute (regardless of the dispute resolution process under the lease). A lawyer can only represent a party in certain circumstances.
If the dispute is unable to be resolved during mediation, proceedings can be commenced in QCAT (with strict timeframe requirements).
What if my agreement does not comply with the Regulation?
The parties can “contract out” of the substantive provisions of the Regulation (except for dispute resolution) and existing agreements are not invalid. However, either party is still entitled to seek negotiation under the Regulation.
The core of the Regulation is the need for landlord and tenants to reach agreement. Those landlords and tenants will need to consider what they can “live with” in terms of a negotiated deal over the expected timeframe.
The alternatives to negotiated deals include long-term uncertainty, disputes and parties “going under” financially.
Wilson Lawyers will continue to assist landlords and tenants reach and record negotiated deals.
Important Notice:The information in this article is current as at 5 June 2020. It is for general purposes only and reflects a rapidly changing situation. Consequently, this article is not intended to constitute legal advice.
We are constantly reviewing and staying tuned-in to all developments within the commercial leasing area. If you need some advice or guidance, please contact us to see how we can help on 07 3392 0099.
Written by Julian Creagh, Associate and Sam Rose, Graduate, Wilson Lawyers.