On 28 May 2020, the Queensland Government released the long awaited Retail Shop Leases and Other Commercial Leases (Covid-19 Emergency Response) Regulation 2020 (Regulation) made under the COVID-19 Emergency Response Act 2020 Qld.
For the most part, the Regulation adopts into Queensland law the leasing principles published by the Prime Minister’s office in the National Cabinet Mandatory Code of Conduct in April 2020 (Code) and incorporates the good faith leasing principles set out in the Code.
WHO DOES THE REGULATION APPLY TO?
The Regulation applies to affected leases, which are defined to include:
- the lease is a retail shop lease or a lease wholly or predominantly for carrying on the business of the tenant;
- the lease was current and binding on the tenant as at 28 May 2020;
- the tenant is an SME entity, being a tenant entity (not its group) that carries on business or is a non-profit body, with an anticipated turnover for the current financial year of less than $50m, or an actual turnover for the previous financial year of less than $50m; and
- the tenant is eligible for the Commonwealth’s JobKeeper scheme.
In the case of franchised businesses, where a franchisee is occupying premises leased by a franchisor, and the franchisee’s occupation of the premises meets the criteria to be deemed an affected lease, the franchisor’s lease of the premises from the landlord will also be regarded as an affected lease.
Most farming, agricultural and pastoral leases are excluded from the operation of the Regulation.
WHAT PERIOD DOES THE REGULATON APPLY TO?
The Regulation applies to an affected lease during the response period, being the period starting on 29 March 2020 and ending on 30 September 2020.
RESTRICTIONS ON LANDLORD’S CONDUCT DURING RESPONSE PERIOD
The Regulation prohibits the landlord taking a prescribed action against a tenant under an affected lease during the response period, for:
- the tenant’s failure to pay rent or outgoings for a period wholly or partly during the response period; or
- the business not being open during the hours required under the lease.
A prescribed action includes:
- 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.
However, the landlord may take a prescribed action:
- Where a variation to the lease or settlement agreement made pursuant to the Regulation permits an action to be taken;
- Where the tenant, despite a genuine attempt from the landlord to renegotiate the rent, fails to renegotiate the rent and act in accordance with the Regulation (such as failing to act reasonably and in good faith or failing to provide sufficient information under the Regulation); or
- On non COVID-19 pandemic related grounds.
IS THERE A RENT FREEZE?
The landlord may not increase the rent (excluding turnover rent) under an affected lease during the response period.
However, if the lease provides for a rent review during the response period, the landlord may review the rent under the lease but must not pass on any increase from that review until the end of the response period.
CAN LANDLORDS REDUCE SERVICES TO PREMISES?
The Regulation permits landlords to cease or reduce provision of services to affected lease premises where the tenant is unable to operate its business from the premises.
NEGOTIATION OBLIGATIONS TO BE FOLLOWED BY LANDLORDS AND TENANTS UNDER THE REGULATIONS
The Regulations set out the following procedure for an affected lease:
- Any party to an affected lease can trigger a process for renegotiation of rent and other conditions, after which each party must give sufficient information to enable fair and transparent negotiations.
- Within 30 days after request (and provision of the required information), landlords must make an offer to the tenant taking into account certain requirements. The offer must:
- relate to any or all of the rent payable under the affected lease during the response period;
- grant at least 50% of rent relief as a waiver rather than a deferral;
- require payment of any deferred rent to be amortised over a period of at least 2 years but not more than 3 years, with repayments only to commence at the end of the response period;
- not require any interest or other fee to be paid on any waiver or deferral of rent;
- take into account:
- all the circumstances of the tenant and the affected lease including the reduction in turnover experienced by the tenant;
- the extent to which a failure to reduce rent would compromise the tenant’s ability to comply with their obligations under the lease;
- the landlord’s financial position, including any financial relief provided to the landlord as a COVID-19 response measure; and
- where any portion of the rent or other amount payable under the lease represents land tax, rates, statutory charges, insurance premiums or outgoings for which the landlord has received a reduction or waiver, the amount payable.
- Once a landlord has provided its offer, the parties must negotiate in good faith.
- A lease extension must be offered for a period equal to any agreed rent waiver/deferral period (except in circumstances where the landlord has a legal obligation or commercial purpose for the premises which would prevent the extension).
- The agreement between the parties can be documented by written variation or other agreement (e.g. deed).
CAN THE LANDLORD HOLD THE SECURITY UNDER THE LEASE UNTIL VARIATION TERMS HAVE BEEN FULFILLED BY THE TENANT?
The landlord may continue to hold any existing lease security (e.g. bond or bank guarantee) until any deferred rent has been paid.
This may create an issue for landlords if they hold a bank guarantee with an expiration date that precedes the period by which the deferred rent pas been paid. The Regulation is silent on this issue.
CAN THE PARTIES RENEGOTIATE?
The tenant may seek a further reduction in rent if the ground on which agreement was based changes in a material way. In that case, a similar offer/negotiation process is permitted except that the landlord is not required to provide any further rent relief as a rent waiver to the tenant on a renegotiation (i.e. the rent relief would be by deferral only).
WHAT IF THE PARTIES CANNOT AGREE?
If the parties cannot reach agreement, either of them can refer the matter to the Small Business Commissioner for mediation and (in certain circumstances) to QCAT.
CAN THE PARTIES AGREE OUTSIDE OF THE REGULATIONS?
The tenant and landlord can make an agreement about a rent reduction that is not consistent with the obligations of the Regulation. Either the tenant or landlord can seek to negotiate the conditions of such an agreement.
AGREEMENTS ALREADY IN PLACE BEFORE 28 MAY 2020
If a tenant and landlord made a written agreement to reduce rent before 28 May 2020, this agreement can remain in place. However, either party can seek a new agreement if the outcome would be different under the Regulation.
HOW CAN WE HELP?
Any agreement reached between landlords and tenants under the Regulation (whether by mediation or negotiation) will need to be documented in writing by a variation to the lease. It is also important that any financier of the landlord or the tenant be included in the negotiation process so that an outcome can be achieved that is acceptable to all parties.
We are well placed to assist landlords and tenants in negotiating the terms of these lease variations in compliance with the Regulation and to prepare the required documentation to ensure the parties’ rights are protected.
Please contact us to discuss starting the process.