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12 May 2020

ACT landlords and tenants can now proceed under new negotiation framework for COVID-19 relief

The ACT Government yesterday created the missing parts for ACT landlords and tenants seeking to renegotiate their arrangements in response to the COVID-19 pandemic. The Leases (Commercial and Retail) COVID-19 Emergency Response Commercial Leases Declaration (Commercial Leases Declaration) together with accompanying Guidance Notes introduce temporary measures for commercial tenants, which will expire on 30 September 2020, as well as some rate relief.

Landlords and tenants financially impacted by COVID-19 in the Australian Capital Territory should therefore be assessing their options now, and ensuring they comply with these new requirements for their negotiations.

Commercial Leases Declaration

Which Commercial Leases are subject to the declaration?

The Commercial Leases Declaration applies where the tenant is an "impacted tenant" under a lease to which the Leases (Commercial and Retail) Act 2001 (ACT) (Leases Act) applies.

An impacted tenant is a tenant who:

  • has qualified for the JobKeeper program at any point during the prescribed period; and
  • has an annual business turnover of less than $50 million in the 2018-2019 financial year.

Impacted Tenant and prescribed breach under a prescribed lease during the prescribed period

The Commercial Leases Declaration only applies where an impacted tenant commits a prescribed breach under a prescribed lease during the prescribed period.

An impacted tenant commits a prescribed breach where they fail to pay rent, outgoings or other amounts due under the prescribed lease or to operate the business during the hours required under that lease. The breach must have occurred during the prescribed period.

A prescribed lease is one to which the Leases Act applies and that was entered into before 7 April 2020.

Under the Commercial Leases Declaration, a landlord must not:

  • issue a termination notice; or
  • take any prescribed action,

unless the landlord has engaged in good faith negotiations with the tenant.

Prescribed action

The Commercial Leases Declaration defines prescribed action as the taking of action by a landlord which includes (but is not limited to) the following:

  • eviction of the tenant from, or exercise a right of re-entry to premises under the lease;
  • forfeiture;
  • damages;
  • require payment of penalty interest or a fee or charge on or related to unpaid rent;
  • possession of the premises;
  • recovery of a security bond or other amount under the lease;
  • any other remedy otherwise available against the tenant under a Territory law.

A landlord must not take any prescribed action against an impacted tenant in relation to a prescribed breach unless the landlord has first engaged in good faith negotiations with the tenant.

While commercially many landlords are likely to be seeking to embark on good faith negotiations with an impacted tenant during the prescribed period, there is no mandatory requirement to do so under the Declaration until the impacted tenant has first committed a prescribed breach.

Requirement to negotiate in good faith

The Commercial Leases Declaration requires that the good faith negotiations must have regard to the principles contained within the Code of Conduct (SME Commercial Leasing Principles during COVID-19 (National Code).

Some of these principles of the National Code include:

  • landlords and tenants share a common interest in working together, to ensure business continuity and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during a reasonable period;
  • landlords and tenants are to negotiate in good faith;
  • landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements and to work towards achieving mutually satisfactory outcomes;
  • any agreed arrangements will take into account the impact of the COVID-19 pandemic on the tenant, with specific regard to its revenue, expenses and profitability. Such arrangements will be proportionate and appropriate based on the impact of the COVID-19 pandemic plus a reasonable recovery period; and
  • the parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions in order to achieve outcomes consistent with the objectives of the National Code.

The Declaration does not prescribe the format of the good faith negotiations but the Guidance Notes suggest that they are expected to involve:

  • a tenant providing evidence substantiating financial hardship;
  • a landlord providing evidence of their financial position;
  • negotiation taking place, having regard to the National Code principles (as set out above).

Rate relief for landlords

The ACT Government has also introduced some rate relief measures aimed to assist commercial landlords for rates charged after 1 April 2020 for up to 6 months based on a tiered category system where the commercial building has an unimproved value of $2 million or below.

There is a tiered category system as follows:

  • Category 1: Businesses partially or not affected. Business tenants should continue to pay rent;
  • Category 2: Businesses significantly affected (at least 30% reduction in business income) but still operating; and
  • Category 3: Businesses who have effectively shut down operations (at least 80% reduction in business income).

For landlords:

  • with a Category 2 tenant, assistance will be up to 25% of the rent reduction, capped per quarter at the lesser of $5,000 (or around $380 per week) or total of the quarterly rates bill.
  • with a Category 3 tenant, assistance will be 50% of the rent reduction, capped per quarter at the lesser of $8,000 (or around $615 per week) or total of the quarterly rates bill.

Thus, under the scheme, where a commercial landlord has reached agreement with a Category 2 or Category 3 tenant to reduce rent, the ACT Government will provide a rebate to that landlord which is up to 50% of the amount the landlord has have taken off the tenant's rent, but with the rebate capped as noted above.

The level of assistance provided will depend on the extent to which the tenant has been affected and the level of rent reduction that has been agreed between the parties.

Witnessing and attestation of certain documents

New document witnessing and signing requirements have been introduced in the ACT under the COVID-19 Emergency Response Act 2020. (COVID-19 Act). The new requirements permit signatures to be witnessed, certain documents to be certified, and affidavits to be sworn by way of audiovisual link.

The witness, signatory or other person must be present by the audiovisual link and must:

  • observe the person signing the document (signatory) sign the document in real time;
  • confirm the signature was witnessed by signing the document or a copy of the document; and
  • be reasonably satisfied that the document the witness signs is the same document or a copy of the document, signed by the signatory; and
  • endorse the document, or a copy of the document with a statement:
    • as to the method used to witness the signature of the signatory; and
    • that the document was witnessed in accordance with the relevant section of the COVID-19 Act.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.