The National Cabinet’s Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID 19 (“Code”) was first announced by the Federal Government on 3 April 2020. After nearly two (2) months of waiting and on 28 May 2020, Queensland has finally enacted the enabling Regulation, being the Retail Shop Leases and Other Commercial Leases (COVID 10 Emergency Response) Regulation 2020 (“Regulation”), which is made pursuant to the COVID 19 Emergency Response Act 2020 (“Act”) to give the Code legal status.
The Act and its Regulation provide direction for both Landlords and Tenants, in the form of procedures for the parties to negotiate in good faith to lessen the effect of the ongoing COVID 19 emergency and the establishment of a Small Business Commissioner, to assist in the resolution of disputes.
The key definitions under the Regulation that are referred to are summarised at the end of this article.
Operation of the Regulation
The Regulation prohibits a Landlord from taking any Prescribed Action under an Affected Lease for:
- Failure to pay rent or outgoings for a period that is wholly or partially within the Response Period; and
- The business at the premises not being open during the hours required under the lease during the Response Period.
Either party has the right to write to the other party (“Initiator”) and request to negotiate the rent and other terms of the Lease (“Request”), provided such a Request contains the following:
- A clear statement about what the Initiator is seeking and why the lease is an Affected Lease;
- Supporting information (which the Regulation deems to be confidential) that is true, accurate, correct and not misleading that allows the parties to negotiate in a fair and transparent way. Examples include:
- Accurate financial information or statements about the Tenant’s turnover;
- Information demonstrating that the Tenant is an SME Entity;
- Evidence of eligibility for or participation in the JobKeeper scheme;
- Steps the Tenant has taken to mitigate the effects of COVID 19 on the business;
- Details of any assistance being received by Federal, State or local Government.
Within thirty (30) days from receipt of an Initiator’s Request, the Landlord must offer a reduction in the amount of rent and any other proposed changes to the lease terms. At least 50% of the offered rent reduction (for example if the Landlord offers a 40% reduction, then at least 20%) must be a waiver. The offer must take into account the Tenant’s reduction in turnover (but not necessarily mirror precisely with same) and the other matters and circumstances set out in the information supplied by the Initiator, as well as the Landlord’s own financial position and any relief that the Landlord may be entitled to receive (such as from its Mortgagee or in connection with outgoings, such as land tax relief).
The offer must also give the Tenant the option to extend the term of the Lease for the equivalent period that rent is waived or deferred, except where the Landlord has genuine reasons for being unable to do so or requires the Premises on expiry for its own purposes.
All negotiations following the initial offer must be undertaken in good faith with both parties cooperating and acting reasonably.
If an agreement is reached that involved the deferral of rent, outgoings or other payments (or a proportion of them), then the deferral:
- Cannot require repayment of the deferred rent to begin until the day after the Response Period has ended (at present, this is not before 1 October 2020, but this may be extended);
- Must require payment to be amortised over at least 2 years, but no more than 3 years; and
- Cannot require any penalties or interest to be paid on deferred amounts.
The Landlord is entitled to hold any security (bank guarantees, bonds etc) until all of the deferred rent has been paid in full.
Rent may still be reviewed during the Response Period but no increases may be put into effect until after the Response Period has expired and the Tenant will continue to pay the same rent immediately prior to any such review date pending expiry.
Once an agreement is reached, if there is a material change to a party’s circumstances, the Regulation permits the parties to renegotiate. The Regulation does not affect agreements that have been already reached and it also permits the making of agreements that are inconsistent with the Regulations.
If the parties are unable to reach an agreement through good faith negotiations, then either party is at liberty to lodge a dispute notice with the Small Business Commissioner, who is empowered to nominate an independent mediator to convene a mediation between the parties, which will take place seven (7) days after the Small Business Commissioner accepts the dispute notice. The Regulation provides for this to occur privately, without legal representation (unless agreed by the mediator) and on a ‘no admissions’ basis, preventing the subject matter of the mediation being used by a party against another in later Court or Tribunal proceedings. Each party bears their own costs and the Small Business Commissioner pays the mediators fees and costs for holding any mediation conference.
If agreement is still not reached through mediation, then either party is at liberty to apply to a Court or Tribunal to have the matter judicially determined.
Any lease disputes that existed between the beginning of the Response Period and the date of enactment of the Regulation (ie between 29 March 2020 and 27 May 2020) that have not been resolved, completed or finalised will be stayed until the Response Period has ended.
The Regulation only permits a Landlord to take Prescribed Action in relation to an Affected Lease if:
- The Landlord is doing so on a ground that is not related to the effects of COVID 19;
- The Landlord is doing so pursuant to an agreement that the parties have entered into in accordance with the Regulation, that has not been complied with; or
- Despite genuine and good faith attempts by the Landlord, the Tenant has substantially failed to comply with its obligations to negotiate in good faith. This includes any failure of the Tenant to provide a complete and properly made Request in the first instance.
The Regulation also permits a Landlord to cease or reduce services to the premises, to the extent that it is reasonable to do so if the Tenant is unable to operate, thereby reducing the cost of outgoings to the Premises, for the benefit of both parties.
· Retail Shop Leases;
· Commercial Leases including Agreements for Lease or Offers to Lease that are binding on the parties as at 28 May 2020, even if the commencement date has not yet passed;
· Tenant is a SME entity;
· Tenant or a connected, affiliated or related entity (such as a service company or a employs staff for the business) is eligible to participate in the JobKeeper scheme;
· Franchise arrangements where the lease is a head lease to a franchisor or leasing entity that is connected, affiliated or related to the franchisor and the premises are sublet to and occupied by a franchisee.
· Most farming, agricultural and pastoral leases.
|Response Period:||The period from 29 March 2020 to 30 September 2020.|
|Prescribed Action:||Starting a proceeding in a Court or Tribunal or taking an action under a lease or any other agreement to:
· Recover possession or exercise a right of re-entry or forfeiture;
· Terminate the lease;
· Seize goods or property to secure payments;
· Seek damages;
· Charge interest or penalties on unpaid rent or outgoings;
· Call up a bank guarantee, bond, indemnity or other security;
· Take action against a Guarantor; or
· Exercise or enforce another right of the Landlord under the Lease or another agreement.
|SME Entity:||· Business carried on by a sole trader;
· Business employing fewer than 20 fulltime, or fulltime equivalent employees;
· Tenant’s turnover was less than $50,000,000.00 for the 2018/2019 financial year or is likely to be less than $50,000,000.00 for the 2019/2020 financial year.
|Affiliate and ‘connected with”||As defined in the Income Tax Assessment Act 1997 (Cth).
If the Tenant is connected with or an affiliate of another entity, it is their combined turnover that is assessed to determine whether they are a SME Entity.
|Small Business Commissioner||The supervising authority empowered to deal with disputes that are not settled through good faith negotiations between the parties.|
Summary and conclusion
For Tenants that are suffering from the effects of COVID 19, the making of an initial Request to your Landlord (or its solicitors) can be a daunting task and the strength of such a Request will often dictate how the parties begin their negotiations. This should be as compelling as possible to achieve the best result possible.
For Landlords, their own financial position is often directly affected when a Tenant is struggling to meet the financial obligations in their Lease. The importance of receiving proper legal advice regarding the strategies that a Landlord can deploy to reach an outcome that balances the Landlord’s own financial interests with the Tenant’s ongoing ability to perform the Lease cannot be overstated.
Irrespective of whether you are a Landlord or a Tenant, our experienced commercial or property lawyers are able to assist you in providing a comprehensive and compelling Request, assisting you throughout all stages of negotiation, mediation and if necessary, Court or Tribunal proceedings and otherwise providing prudent and practical advice in these unprecedented times.
Contact us today should you require assistance with any of your leasing matters.