02 June 2020

COMMERCIAL TENANCIES

This is the third legal update in our series about the National Cabinet’s Mandatory Code of Conduct for commercial tenancies and the State level legislative implementation of that Code in response to the COVID-19 pandemic economic fallout.

See here for our first legal update (16 April 2020) and here for our second (28 April 2020).

WHAT’s HAPPENED?

The Queensland Parliament has had regulation making power regarding the COVID-19 emergency since 23 April 2020. On 28 May 2020, the long awaited implementation of the National Code was unveiled by the making of the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld).

This regulation is Queensland’s interpretation and implementation of the National Code. As with other Australian states and territories, the Queensland regulations are unique and differ in some key respects to aspects of the National Code.

Note that a separate Regulation granting relief under State land leases and licences has also been released but is not considered here.

WHAT LEASES DO THE REGULATIONS APPLY TO?

Each of the following conditions must be met for the lease to be an “affected lease” and the Regulations to apply:

  • the lease must be a retail shop lease or a lease of premises predominantly used for carrying on a business; and
  • the lease must be binding on the lessee (even if the lease hasn’t commenced yet); and
  • the lessee must be an SME entity with an annual turnover of less than $50 million (aggregated turnover for connected or affiliated entities including internet sales); and
  • the lessee (or an entity connected or affiliated with the lessee who employs staff for the business) must be eligible for the JobKeeper Scheme with a fall in turnover of 30% or more.

This captures a smaller group of leases than the National Code which also applies to other tenants who are unable to generate sufficient revenue as a direct result of COVID-19 making the tenant unable to meet its financial/contractual obligations and broadly, to any other business, having fair regard to the size and financial structure of those businesses.

WHAT’S THE RELIEF PERIOD?

The relief under the Regulations is for the “response period” from 29 March to 30 September 2020. This is possibly a shorter period than the National Code, which applies to about the same period plus a “reasonable subsequent recovery period”.

WHAT’S THE RELIEF?

The Regulations significantly change the rights and obligations of lessors and lessees.

During the “response period”, for “affected leases”, under the Regulations:

  • Rent reductions, rent deferrals and changed lease conditions. If a party triggers the process set out in the section below, the lessor must offer the lessee a rent reduction and/or deferral and change any other lease conditions. Refer to item 4 below for further information.
  • No rent increases. Lessors are prohibited from increasing rent (unless it is turnover rent). A lessor can apply a rent review under an affected lease but it cannot give effect to the increase until the response period ends (and foregoes the increased rent during the response period).
  • No recovery actions. Lessors are prohibited from undertaking “prescribed actions” for a lessee’s failure to pay rent, outgoings or open for business. This includes recovery of possession, terminating the lease, eviction, re-entry, seizure of property, forfeiture, applying interest/charging fees or claiming on bank guarantees, indemnities and security deposits for unpaid rent or outgoings.

WHAT’S THE PROCESS?

The Regulations have a formal process to resolve lease renegotiations that ends up in dispute resolution. Many of the steps do not have specific timeframes so the duration of the process will vary in each case.

The process is:

  1. The lessor or lessee gives notice to the other party, asking the other party to negotiate and specifying the conditions of the lease the party wishes to negotiate (rent and others).
  2. As soon as possible after the notice, the parties must exchange “sufficient information” regarding the request that is accurate and not misleading and will allow the parties to negotiate in good faith and transparently. Examples of sufficient information given includes evidence of meeting the conditions for being an “affected lease”. (Note, evidence of a lessor’s circumstances and capacity to grant relief is not listed as an example but is a matter the lessor must have regard to in making a offer to a lessee. Refer to item 4)
  3. The parties must negotiate the lease terms.
  4. Within 30 days after receiving the “sufficient information” the lessor must offer the lessee a rent reduction and any other proposed changes to the lease conditions. The Regulation prescribes the scope of the offer. The lessor’s offer must:
    • have regard to the lessee’s circumstances and loss of turnover (but unlike the National Code, the Regulations do not require proportionality with the loss of turnover), the lessee’s ability to meet its obligations under the lease, the lessor’s financial position and any reduction or waiver in land tax, Council rates etc;
    • be for rent payable under the affected lease during the response period;
    • provide for no less than 50% of any rent reduction as a rent waiver; and
    • if rent is waived or deferred include an offer to extend the term of the lease for the same period as the rent waiver or deferral. The lessor is not required to do so if it is legally bound otherwise or has another commercial purpose for the premises.

If the parties agree to a rent deferral:

    • repayment must not commence until the end of the response period;
    • the repayment period will be not less than 2 years but not more than 3 years (this is a shorter period than under the National Code which provided for repayment for up to the balance of the lease term); and
    • the lessor cannot charge interest or other fees on the deferred rent unless the lessee defaults on repayment.
    • After receiving the lessor’s offer, the parties must cooperate, act reasonably and in good faith to negotiate the rent reduction and other changed lease conditions.
    • The parties give effect to the rent reduction and changed conditions by a lease variation or other agreement.
    • If there is a material change to the grounds of the agreement reached, a party may seek to renegotiate and this process applies again. However, for the further negotiation, the lessor’s offer does not need to include that 50% of any rent reduction is a rent waiver. This applies to agreements reached before the Regulations were made.

Parties must keep information exchange confidential and there are penalties of up to $2,669 for failing to do so.

WHAT IF You CAN’T REACH AGREEMENT?

The Regulations contain a dispute resolution process, which the parties can choose to adopt instead of a process under the affected lease itself (or any another process, including under the Retail Shop Leases 1994 (Qld)). If the process under the Regulations is commenced, it must be completed before referral to arbitration, the Queensland Civil and Administrative Appeals Tribunal (or QCAT) or a Court.

Again, many of the steps do not have specific timeframes so the duration of the process will vary in each case.

A party commences the process by giving a dispute notice to the Small Business Commissioner. The Commissioner can accept or dismiss the notice if it does not relate to an affected lease, is frivolous or vexatious or has not been given in good faith.

As soon as possible, the Small Business Commissioner appoints a mediator and nominates a mediation date within 7 days (which can be extended by a further 7 days).

Parties must attend the mediation. Parties can be represented by agents, officers or employees but only lawyers with approval of the mediator if it would assist the mediation or consideration of complex issues. The mediation is at each parties cost. The mediator is at the Small Business Commissioner’s cost.

The outcome will be a settlement agreement or notice of outcome. Only then can the dispute be referred to arbitration, QCAT or a Court.

WHAT SHOULD YOU DO?

  1. If you are a tenant, confirm your eligibility for the JobKeeper program and that your lease is an affected lease.
  2. If you are a tenant, prepare to be transparent – you will need to substantiate your turnover decline with financial statements and other financial information.
  3. If you are a landlord, prepare to share details of relief from your bank and any State based relief – you will need to substantiate your capacity (or not) to offer relief.
  4. Prepare well. Carefully craft any notice given under the Regulations. Know your ‘end goal’ for example, the lease conditions you wish to negotiate and the economic effect of COVID-19 on your turnover. A failure to identify a condition to negotiate upfront may exclude it from the lessor’s required offer in response.
  5. Preserve your position. If you are a landlord, continue to review rent in accordance with the affected lease but do not apply any increase until after the response period.
  6. Formally document any agreement reached during the negotiation process or dispute resolution process.

 

This alert contains general information only. For advice and assistance please contact our Commercial team.

To contact one of our Commercial Lawyers today, please click here

 

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