This article was written by Chris Pitson, Julian Bolger and Connor Fitzgibbon.
Queensland's Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Regulations) has been amended – extending its effect to the months of October, November and December in 2020.
This alert takes a closer look at two of the key differences in the way the Regulations treat the extension period compared to the initial response period and at some of the finer points on how deferrals, rent increases and rent relief negotiations are impacted.
At a glance:
- extended operation – the amendments introduce an additional period of operation for the Regulations between 1 October 2020 and 31 December 2020.
- comparison to original response period – the new extension period is largely treated in the same way as the initial ‘response period’ of 29 March 2020 to 30 September 2020 (e.g. landlords prohibited from taking prescribed actions, obligations to negotiate rent relief), but there are two key differences:
- additional eligibility hurdle – for a lease to be an ‘affected lease’ during the extension period, the tenant needs to now also qualify for the new JobKeeper scheme (in addition to the original eligibility requirements); and
- no rent waiver obligation – unlike the initial response period, rent relief offered for the extension period does not have to include a waiver of rent (i.e. the relief offered can be deferral only).
- no automatic application of previously agreed rent relief – tenants with an ‘affected lease’ during the extension period may request to negotiate the rent payable under the lease for the extension period, the Regulations do not automatically apply or extend arrangements agreed for the initial response period into the extension period.
- continued freeze of rent reviews – rent reviews under an ‘affected lease’ which were due to occur during the initial response period or extension period remain frozen until (and can only take effect after) 31 December 2020.
- repayment date for initial response period deferrals not extended – rent deferrals agreed in respect of the initial response period can remain repayable from 1 October 2020 (i.e. no further extension to repayment dates for those deferrals).
A quick look back – how did we get here?
The Regulations were introduced on 28 May 2020 in order to implement the National Cabinet Mandatory Code of Conduct for SME Commercial Leasing, with an initial period of operation from 29 March until 30 September 2020 (inclusive) (Initial Response Period).
The Regulations broadly:
- provided a framework for landlords and tenants of 'affected leases' to negotiate rent relief;
- prohibited landlords from taking prescribed actions against tenants of 'affected leases' for failure to pay rent during the Initial Response Period; and
- froze any rent reviews due to occur during the Initial Response Period.
See also our May alert for our further commentary on the Regulations as originally passed.
On 29 September 2020 (just before the expiry of the Initial Response Period), amendments to the Regulations were passed – effectively extending the operation of the Regulations out until 31 December 2020 (the additional period from 1 October 2020 to 31 December 2020 being the Extension Period).
What are the two key differences between the requirements for the 'Extension Period' by comparison to the 'Initial Response Period'?
Extra eligibility hurdle
The amendments introduce a new eligibility requirement for 'affected leases' during the Extension Period, such that a relevant tenant must now be eligible for the JobKeeper scheme that runs from 28 September 2020 until 4 January 2021. Generally, this will require tenants to show that their current GST turnover has declined by the relevant shortfall percentage (generally 30%)[1] in the September 2020 quarter relative to a comparable period (generally the corresponding quarter in 2019).[2]
This is in addition to the continuing original eligibility requirements, being:
- the lease must be a retail shop lease or a lease wholly or predominantly for carrying on the business of the tenant;
- the lease must have been current and binding on the tenant as at 28 May 2020;
- the tenant must be an SME entity (i.e. an entity 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 must have been eligible for the initial JobKeeper scheme.
The change in test emphasises that the Extension Period is very much an 'extra' relief period – not an extension of the original relief period. Tenants will need to establish again that they are eligible – and landlords should ensure they are seeking any additional information needed to test whether the extra eligibility hurdle has been cleared.
No waiver minimum
For the Initial Response Period, the Regulations were prescriptive in setting a minimum proportion of rent waiver (rather than deferral) that needed to be offered as part of rent relief packages.
That limitation does not apply to the Extension Period, with landlords and tenants free to agree rent relief packages that consist of rent deferral only for the Extension Period.
What do the amendments mean for rent increases scheduled during the Initial Response Period or Extension Period?
In short, the freeze on rent increases continues. Rent reviews under an affected lease which were scheduled to occur at any time between 29 March 2020 and 31 December 2020 can only take effect after 31 December 2020.
What do the amendments mean for repayment of rent deferrals in the Initial Response Period or Extension Period?
The way the amendments have been incorporated (as a new and separate 'extension period' rather than an extension of the initial 'response period') has had an interesting impact on when deferred rent can start to become repayable. In summary:
- Any deferred rent from the Initial Response Period remains repayable after the end of the Initial Response Period.
- Any deferred rent from the Extension Period cannot be made repayable until after the end of the Extension Period.
What do the amendments mean for rent relief negotiations?
Extension Period negotiations - subject to the key differences identified above, the negotiation process in respect of the Extension Period is largely a repetition of the process that was undertaken for the Initial Response Period. In summary:
- If a tenant requests rent relief under the Regulations during the Extension Period (and the tenant is eligible to do so), the parties must follow a similar negotiation and information exchange process as during the Initial Response Period.
- Any rent relief offered by a landlord during the Extension Period to tenants of an 'affected lease':
- may take account of any historical rent reduction it has already offered to the tenant before 29 September 2020;
- does not have to consist of a waiver of rent; and
- must amortise any deferred rent from the Extension Period - using a method agreed by the parties - over a period of at least 2 years but no more than 3 years (starting no earlier than 1 January 2020).
Initial Response Period negotiations - any agreements made with tenants during the Initial Response Period remain on foot. The process and requirements for negotiations not yet concluded in respect of that period remain unchanged.
What do the amendments mean for enforcement by landlords?
The prohibition on landlords taking prescribed actions under affected leases for identified breaches (being tenant failure to pay rent, tenant failure to pay outgoings and tenant failure to trade specified hours) has been extended to also apply throughout the Extension Period.
It is important to note that landlords are not prohibited from taking prescribed actions (including during this Extension Period):
- in respect of a breach that relates to a period outside of the Initial Response Period or the Extension Period; or
- in respect of other types of breaches that are not protected (e.g. assignment without consent).
Action Points
The way in which the Extension Period has been implemented will require landlords and tenants to again come together to negotiate appropriate rent relief outcomes. Both parties will now no doubt be familiar with the operation of the process from their experience in respect of the 'Initial Response Period' – but the slightly altered process for the Extension Period is likely to lead to some different results.
We are continuing to advise landlords and tenants as they grapple with the complex requirements imposed by both the original Regulations and by these recent changes - and are on hand to help achieve successful negotiation outcomes.
[1] The specified shortfall percentage is – relevantly - 15% (for registered charities) or 30% (for non-charitable entities which generally have an aggregated turnover of less than $1 billion per annum).
[2] Tenants may use any other alternative test formulated by the Australian Taxation Office where the quarter ending September 2020 is not an appropriate comparison period (if applicable).
