Contributions to this article were made by Emily Masters, Simone Menz, Chris Wheeler, Carl Black, Tristan Howes and Julia Nikolic.
South Australia has recently joined New South Wales, Victoria and the ACT in enacting Regulations to give effect to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (National Code).
The COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (SA) (Regulations) were made on 15 May 2020, replacing earlier regulations under the COVID-19 Emergency Response Act 2020 (SA) (Act).
The Regulations apply broadly, more so than in other States and Territories, to all leases other than residential leases. Some aspects of the Regulations, including the obligation to negotiate in relation to rent relief, apply regardless of whether the tenant has suffered financial hardship. However, courts can only order rent relief for tenants if they meet the relevant eligibility tests. Another major difference in South Australia is that all people with an interest in the relevant premises (this would include mortgagees) must take part in the good faith negotiations. It will be interesting to see how this obligation is fulfilled in practice.
This alert summarises the Regulations, and clarifies the implications for landlords and tenants.
South Australia Act and Regulations
The Act (assented to on 9 April 2020) and the Regulations (released on 15 May 2020) clarify the way the National Code will apply in South Australia. The Regulations will apply for the six month period from 30 March 2020 to 30 September 2020 (Prescribed Period).
- In determining the rent to be payable during the Prescribed Period the parties must have regard to the economic impacts of the COVID-19 pandemic on both parties to a commercial lease. This represents an update from the National Code and will enable consideration of the economic circumstances of landlords and their financial ability to grant relief to tenants.
- The definition of a commercial lease is broader than those leases captured by the implementing legislation in other States and Territories, capturing all leases except for residential leases, regardless of whether a business is conducted at the premises.
- The Regulations require parties to all commercial leases, not just those with affected lessees (tenants who have suffered financial hardship with less than $50 million in turnover), to renegotiate the rent payable in good faith. However, landlords may have regard to the National Code to justify not giving rent relief to parties that are not affected lessees and should take comfort from the fact that tenants can only access mediation via the Small Business Commissioner and court proceedings if they are affected lessees.
- The Regulations require third parties (such as guarantors and mortgagees) to be involved in discussions about rent relief. This will add an additional layer of complexity to negotiations, by requiring a wider range of potential interests to be considered.
The Act and the Regulations apply to commercial leases, which are very broadly defined to be:
- any agreement under which a person grants or agrees to grant another person for value a right to occupy premises for carrying on a business; and
- a lease under the Landlord and Tenant Act 1936 (SA), being leases other than residential leases,
provided they have been entered into before 30 March 2020 (excluding extensions or renewals).
The Regulations expressly exclude leases under the Pastoral Land Management and Conservation Act 1989 (SA) or the Crown Land Management Act 2009 (SA).
Certain provisions also only apply to affected lessees, being a tenant who:
- is suffering financial hardship as a result of the COVID-19 pandemic (which is automatically established if the tenant is eligible for or receiving a Jobkeeper payment); and
- had a turnover of less than $50 million in the 2018/2019 year or other period determined by the Magistrates Court (assessed at the franchisee level for franchises and group level for corporate groups).
Unlike the usual approach in other jurisdictions, many provisions of the Regulations apply to commercial leases generally, rather than only those leases with affected lessees.
The Regulations require parties to all commercial leases (and not only those with an affected lessee), and any other person with an interest in the lease, to make a genuine attempt to negotiate in good faith to agree the rent payable under the commercial lease during the Prescribed Period. The parties must take the following matters into account:
- the economic impacts of the COVID-19 pandemic on the parties;
- the Act and the Regulations; and
- the provisions of the National Code.
The Regulations do not provide a comprehensive list of circumstances relevant to determining the appropriate amount of any reduction. However, the following factors are a useful guide – these must be taken into account by the Court in making orders relating to rent relief:
- the reduction in turnover of the tenant’s business;
- whether the landlord has agreed to waive any outgoings or other amounts payable under the commercial lease;
- whether failure to provide rent relief would compromise the tenant’s ability to fulfil their obligations under the commercial lease;
- the ability of the landlord to provide rent relief, including any relief provided to them by a third party (e.g. relief provided by banks); and
- any reduction in third party outgoings in relation to the premises (e.g. council rates or land tax).
Whilst strict compliance with the National Code is not required, the requirement for the parties to take the National Code into account in agreeing the rent payable means that the National Code process should guide negotiations. The National Code provides that landlords should provide rent relief (up to 100%), with at least 50% of any rent reduction to be given in the form of a rent wavier.
Unlike other jurisdictions, where the obligation to negotiate is limited to certain tenants, the parties to all commercial leases in South Australia are required to negotiate under the Regulations. However, landlords may still decline to grant relief to those who do not qualify as affected lessees, as the definition of affected lessee mirrors the qualification principles for tenants to receive relief under the National Code. Only affected lessees can apply to the Small Business Commissioner for mediation, and mediation is a pre‑requisite for obtaining any Court ordered relief.
Restrictions on landlords taking action for breaches
The Act and the Regulations prohibit certain landlord conduct, including:
- taking a range of prescribed actions against affected lessees (including evicting an affected lessee, exercising a right of re-entry, recovery of land, damages, requiring the payment of interest on unpaid rent, recovery of a security bond, possession or termination of a commercial lease), on account of:
- failure to pay rent or outgoings (however landlords may enforce the payment of rent agreed in a mediation or determined by the Court by affected lessees. Notably, there is no exception for enforcement of rent arrangements directly negotiated between the parties);
- reducing trading hours or ceasing trading; or
- any act or omission of a tenant required by the laws of South Australia in response to the COVID-19 pandemic;
- increasing rent payable by an affected lessee during the Prescribed Period, other than turnover rent in retail leases (unless otherwise agreed); and
- requiring an affected lessee to pay land tax or reimburse the landlord for land tax payments.
The Regulations also include a positive obligation on landlords to pass on the benefit of any land tax relief to the affected lessee by way of a rent waiver.
Mediation and Court proceedings
Parties to a commercial lease may apply to the Small Business Commissioner for mediation in relation to any dispute relating to the COVID-19 pandemic, including disputes about whether a tenant is an affected lessee or the provision of rent relief. The Commissioner will then issue a mediation certificate recording whether the mediation has failed or would not be reasonable, or if either party did not participate at all or in good faith. Parties may only apply to the Magistrates Court for the resolution of their dispute if a mediation certificate has been issued by the Commissioner.
The Court may make a range of orders including determining and granting rent relief (with at least 50% of relief required to be in the form of a rent waiver), deferring the payment of rent, requiring the payment of rent into the Court or modifying the terms of a commercial lease.
The Act requires parties to keep any personal or business information obtained in connection with the operation of the Act confidential (with the usual exceptions for disclosure, i.e. consent, legal proceedings, required to be disclosed by law). The Regulations provide that personal information obtained in connection with a mediation must also be kept confidential (with the same exceptions).
We are on hand to assist landlords and tenants to work through these requirements and negotiate mutually beneficial outcomes to protect their businesses in this unprecented economic climate.