This article was written by Chris Pitson, David Bell, Mark Bayliss, Julian Bolger and Connor Fitzgibbon.
Queensland has now joined the remainder of Australia's Eastern Seaboard by giving effect to the National Cabinet Mandatory Code of Conduct (National Code) for COVID-19 impacted landlords and tenants through the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Regulations).
The Regulations provide relative clarity on how a number of aspects of the National Code are to be implemented in Queensland and (with the benefit of a later release date and time to observe the implementation of the National Code in other jurisdictions) also take a more prescriptive approach on a number of matters which have led to uncertainty in other jurisdictions.
This alert summarises the Regulations and some of the implications for landlords and tenants.
Queensland regulations
The Regulations were made on 28 May 2020 under both the Retail Shop Leases Act 1994 (Qld) and the COVID-19 Emergency Response Act 2020 (Qld).
In general terms the approach taken by the Regulations differs from the approach taken by New South Wales and South Australia – with the Regulations being self-contained and not incorporating the National Code by reference.
The approach taken by Queensland is ultimately more similar to that taken by Victoria.
We have recently released alerts on the implementation of the National Code by each of (in chronological order of implementation) New South Wales, Victoria, the ACT and South Australia.
At a glance:
- primarily relate to the period from 29 March 2020 to 30 September 2020 (Response Period)
- applicable to 'affected leases' where the tenant carries on a business (or is a non-profit), has (and is part of a group with) turnover <$50 million and is eligible for the Commonwealth's JobKeeper scheme
- 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 required information) landlords must make an offer to the tenant taking into account certain requirements (e.g. at least 50% of rent relief offered must be waiver rather than deferral)
- once a landlord has provided an offer the parties must negotiate in good faith
- 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
- parties can seek a further reduction in rent where a ground on which agreement was based changes in a material way in which case a similar offer/negotiation process is triggered
- a lease extension must be offered for a period equal to any agreed rent waiver/deferral period (except in certain limited cases)
- any rent deferral agreed must provide for the deferred rent to be amortised and paid back over a period between 2 and 3 years from the end of the Response Period (and landlords can call on security deposits or bank guarantees after the end of the lease term to meet any deferred rent not paid by the tenant)
- there is a freeze on rent reviews taking effect during the Response Period (though such reviews are preserved and can be applied to increase the rent payable after the end of that period)
- landlords are permitted to cease or reduce provision of services to affected lease premises where the tenant is unable to operate its business from the premises.
When do the Regulations apply?
The Regulations were made on 28 May 2020 and will generally apply for the period from 29 March until 30 September 2020 (inclusive) – in close alignment with the other State specific regimes and the anticipated expiry of the Commonwealth's JobKeeper scheme.
Dispute processes or prescribed actions initiated (but not finalised) during the period from 29 March 2020 to 28 May 2020 are generally suspended until the Response Period ends.
What leases do the Regulations apply to?
The Regulations apply to affected leases, being leases where:
- the lease is a retail shop lease or a lease wholly or predominantly for carrying on the business of the tenant;
The Regulations expressly provide that non-profit activities fall within the concept of carrying on a business.
- the lease was current and binding on the tenant as at 28 May 2020 (regardless of whether the lease had commenced);
This will mean that the Regulations will not apply to leases which ended prior to 29 March 2020.
- the tenant is an SME entity; and
An "SME entity" is defined in the Regulations by reference to section 5 of the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth) to mean 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.
However, even if the tenant itself is an SME entity, if that tenant is "connected with"[1] or an "affiliate"[2] of entities where the tenant and those entities have aggregate annual turnover exceeding $50m, the lease will be excluded from the application of the Regulations. This is consistent with the National Code principle that turnover will be assessed at a corporate group level.
- the tenant is eligible for the Commonwealth's JobKeeper scheme.
Unlike the equivalent Victorian regulations, there is no additional requirement that the tenant be receiving JobKeeper payments.
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.
The Regulations expressly exclude:
- leases under which premises are used to operate farming businesses under the Farm Business Debt Mediation Act 2017 (Qld); and
- leases, permits, licences or subleases under the Land Act 1994 (Qld) unless:
- it is a sublease of premises under a lease which has a rental category of 'business and government core business' or 'divestment'; and
- the sublessor under the sublease is not a government leasing entity.
Do the Regulations restrict a landlord from taking enforcement action?
Yes. Under an affected lease, if during the Response Period the tenant:
- fails to pay rent referable to a period occurring wholly or partly during the Response Period;
- fails to pay outgoings referable to a period occurring wholly or partly during the Response Period; or
- does not open for business as normally required under the lease,
the landlord is restricted (subject to certain conditions discussed below) from pursuing any 'prescribed action', such as:
- recovering possession of the leased premises or exercising a right of re-entry to the leased premises;
- terminating the lease or evicting the tenant;
- seizing any property, including for the purpose of securing payment of rent;
- claiming or seeking damages or payment of interest, fees, or charges relating to unpaid rent or outgoings; and
- claiming on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings.
However, the above restrictions do not apply to actions:
- agreed between the parties, including under a lease variation or settlement agreement;
- taken by a landlord in accordance with an order of a court or tribunal;
- where the tenant has substantially failed to comply with the tenant's rent negotiation obligations, despite a genuine attempt by the landlord to negotiate the rent payable; or
This is in keeping with the 'good faith' principles of the Regulations and should, in practice, go some way towards addressing scenarios where a tenant refuses to pay rent and also refuses to engage in rent negotiations and provide information necessary to enable those negotiations.
- taken by a landlord on a ground that is not related to the effects of the COVID-19 emergency.
This is consistent with the National Code principle that tenants should (outside of COVID-19 impacts) continue to comply with their lease obligations.
What is the process for rent relief negotiations?
The Regulations prescribe a process under which any party to an affected lease can require negotiation for rent relief (or variations) during the Response Period.
The process is as follows:
Rent Relief Request
A party to an affected lease may ask the other party to negotiate the conditions of the lease, including the rent payable.
Interestingly, the Regulations provide flexibility for either of the tenant or the landlord to initiate the negotiation process.
Information Exchange
The parties must then exchange, as soon as practicable, information relating to the request, that is sufficient to allow for informed negotiations.
Examples of sufficient information are included in a note to the Regulations, including: a statement setting out the terms that the tenant is seeking to negotiate and demonstrating why the lease is an affected lease; accurate financial statements about the tenant's business turnover; evidence of the tenant's eligibility for the Commonwealth's JobKeeper scheme; and evidence of steps the tenant has taken to mitigate the impact of COVID-19 on the tenant's business, including any government assistance being provided to the tenant.
Rent Reduction Offer
Within 30 days after the parties provide sufficient information as required above, the landlord must offer the tenant a reduction in the amount of rent payable under the lease, along with any other proposed changes to the lease terms.
Given the threshold of 'sufficient information' could be construed subjectively, there is potential for disputes to arise as to when the 30 day offer period commences or expires, notwithstanding the overriding good faith obligation.
The landlord's offer must:
- provide for no less than 50% of the rent reduction to be offered as a waiver of rent; and
- have regard to (amongst other things):
- all of the circumstances of the lessee and affected lease (including reduction in turnover during the Response Period);
- whether failure to provide relief would compromise the tenant's ability to fulfil its obligations under the lease;
- the landlord's financial position; and
- any waiver or reduction of outgoings (such as rates or statutory charges).
The Regulations do not expressly require that the rent reduction must be proportionate to the reduction in the tenant's turnover during the Response Period.
Offer Negotiation
After the landlord's offer is received by the tenant, the parties must then cooperate and act reasonably and in good faith in negotiating rent appropriate reductions/variations.
Formalisation
If the parties reach agreement on the reduction of rent and / or the variation of any lease terms, the changes to the lease can be formalised by way of:
- a variation to the lease; or
- any other agreement between the parties that gives effect to the changes.
Either party may initiate a repeat of the process if a ground on which the original agreement was based changes in a material way, but any further rent relief need not include 50% of that rent relief as a rent waiver.
For completeness, the Regulations preserve the rights of landlords and tenants to negotiate an agreement that is inconsistent with the Regulation. Any agreements struck between landlord and tenants prior to the commencement of the Regulations remain valid, however any such agreement does not prevent either party from seeking to negotiate further rent relief under an affected lease.
Are there limits on rent deferral mechanisms?
If the rent relief comprises a rent deferral:
- the deferred rent must be amortised over a period between 2 to 3 years (commencing after the end of the Response Period); and
- no interest, fees or charges can be imposed on the deferred rent (unless the tenant does not comply with the conditions on which the rent is deferred).
Importantly for landlords, any security deposit or bank guarantee held under an affected lease may continue to be held until any deferred rent is paid (though landlords will need to check expiry dates on bank guarantees, of course). Landlords may also, after an affected lease ends, call on any security deposit or bank guarantee held to recover any unpaid rent (including deferred rent). This overrides any contrary provision in the lease.
Offer of lease extensions – waiver and deferral periods
Where a rent waiver or deferral is agreed, the landlord must (subject to limited exceptions where the landlord has already made commitments in respect of the premises or requires the premises for its own purposes) offer the tenant an extension of its lease for a period equivalent to the deferral or waiver period, on the same terms and conditions as the existing lease.
Rent reviews – freeze on increases
Landlords are prohibited from increasing the rent payable by a tenant under an affected lease during the Response Period (though this does not prevent increases in rent calculated by reference to the tenant's business turnover).
The Regulations do, however, expressly provide that if a rent increase would have fallen within the Response Period it may be given effect on and from the end of the Response Period.
Example provided by the Regulations (as a note in section 13(2)):
The lessor is entitled, on review of rent under the lease, to increase rent on 1 July 2020. The lessor decides to increase the amount of rent payable. The lessee is not required to pay the increased amount, and rent in relation to the increased amount can not start to accrue, until after the end of the response period.
Landlord right to cease or reduce services
There is no express entitlement to a reduction in outgoings payable by a tenant. However, if a tenant is unable to operate their business at the premises for any part of the Response Period because of the COVID-19 emergency, the landlord may cease or reduce providing services at the premises as is reasonable and subject to any reasonable request from the tenant. This may assist the tenant by reducing the outgoings payable under their lease.
Mediation and dispute resolution
Either a landlord or a tenant under an affected lease may refer a dispute under the Regulations to the Small Business Commissioner for mediation, who must then accept or dismiss the dispute (if it does not relate to an eligible lease dispute, is frivolous or vexatious, or has not been given in good faith). Importantly, the parties must attempt to resolve their dispute cooperatively and in good faith before starting mediation. Landlords and tenants may only be legally represented in a mediation with the approval of the mediator. The meditator may allow any person with an interest in the resolution of the eligible lease dispute to participate in the mediation.
Proceedings in connection with a dispute about an eligible lease may only be commenced in the Queensland Civil and Administrative Tribunal where the tribunal has jurisdiction over the matter and a settlement agreement cannot be reached or hasn't been complied with, the dispute is not settled within 30 days of it being notified to the Small Business Commissioner or a party does not attend mediation without a reasonable excuse. Such commencement must be within six months after the later of:
- the affected lease ended; or
- the last day the tenant was required pay deferred rent under an agreement.
Action points
Despite the delay in the release of the Regulations, we have been seeing many examples in the interim of careful negotiations and information sharing between landlord and tenant parties to retail and commercial leases to support the viability of office, industrial and retail operations – and expect the release of the Regulations (on principles which generally align with what was contemplated by the National Code) to enable those arrangements to now be finalised.
For those who have not yet engaged in the negotiation process, the Regulations prescribe a relatively robust negotiation process and (pleasingly) requirements for parties to provide the information required to facilitate transparent negotiations.
We are continuing to advise landlords and tenants as they work through and beyond COVID-19 – and are on hand to assist them in navigating the complex requirements and processes imposed by the Regulations.
[1] generally, where an entity is entitled to distributions of 40% or more from the other entity, or is entitled to exercise 40% or more of the voting power of the other entity. For discretionary trusts, additional tests apply
[2] if the individual or company acts, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert, with the tenant (or vice versa) in relation to the affairs of the business of the individual or company
