Queensland's commercial and retail landlords and tenants can now start negotiating COVID-19 related variations of lease with greater certainty and clarity, following the commencement of the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 yesterday afternoon, 28 May 2020.
The Regulation implements the National Cabinet's Mandatory Code of Conduct to assist Queensland's landlords and tenants manage the impacts that the COVID-19 crisis is having on their businesses and applies to "affected leases" during the "response period", being the period from 29 March 2020 to 30 September 2020.
Is your lease covered?
What leases are covered by the Regulation?
The Regulation applies to a retail shop lease under the Retail Shop Leases Act 1994, or other leases under which the leased premises are to be wholly or predominantly used for carrying on a business (this will include commercial leases).
The Regulation also ensures that franchise arrangements are included (where the tenant is the franchisor and the franchisee occupies the premises).
What is an "affected lease"?
The Regulation offers protection to an "affected lease" being a lease which meets the following three threshold requirements:
1. It is a binding lease
- As at 29 March 2020, the lease, or an agreement to enter into the lease, must be binding on the tenant (even if the lease itself has not commenced);
2. For an SME Entity:
- The tenant under the lease must be an SME entity under the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth). This Commonwealth scheme currently defines an SME entity as:
- a not-for-profit entity; or
- an entity
whose annual turnover from carrying on a business was under $50 million for the financial year 2018-2019 or who is expected to have an annual turnover under $50 million for the current year; and
3. Who is eligible for the JobKeeper scheme
- The Tenant must be eligible for the JobKeeper scheme for a lease to be an "affected lease". Importantly, this means that a tenant does not have to participate in the JobKeeper Scheme, the fact that it is eligible will suffice.
You've got an "affected lease" – what's next?
Negotiation framework for rent reductions
All parties to an "affected lease" will be required to negotiate a variation of the lease, upon the request of one party to the lease. When participating in negotiations:
- all parties to an affected lease are legally obliged to cooperate, act reasonably and in good faith when negotiating; and
- any information disclosed by a party to the affected lease under the Regulation is both confidential and protected – it is an offence for a party to use the information for purposes other than negotiating or resolving the lease dispute under the Regulation, or to disclose the information without consent or as authorised under the Regulation, an Act or law.
The negotiation framework set up by the Queensland Government under the Regulation has five phases:
- Request: Either the tenant or the landlord (the initiator) may make a request to the other party in writing to negotiate an affected lease under the Regulation.
- Information sharing: The tenant and landlord must, as soon as practicable, share information related to the negotiation request that is true, accurate, correct and not misleading, and sufficient to enable the parties to negotiate in a fair and transparent way. The Regulation sets out examples of "sufficient information" as including:
- a clear statement about the terms of the lease the initiator is seeking to negotiate; and
- a statement by the tenant that demonstrates why the lease is an affected lease, accompanied by supporting information and evidence.
- Offer: Within 30 days after a party receives sufficient information about a request, the landlord must offer the tenant a reduction in the amount of rent payable under the lease for the response period, and any proposed changes to the lease conditions. The offer:
- must relate to all of the rent for response period (therefore the offer should be for the entire response period), unless otherwise agreed;
- provide for no less than 50% of the rent reduction offered to be in a form of a complete waiver of rent; and
- have regard to all relevant circumstances regarding the affected lease, which includes the reduction in the tenant's turnover, any reduction to statutory charges and outgoings the landlord has received the benefit of and the landlord's own financial position.
- Negotiate: On receiving the landlord’s offer, the tenant and landlord must co-operate and act reasonably and in good faith in negotiating a reduction in the amount of rent payable under the lease for the response period, including any conditions relating to the reduction in rent.
- Agreement: If agreement is reached, parties may give effect to the rent reduction and other changes to the affected lease by way of a variation to the lease, or other agreement between the parties. Any agreement should be documented in writing. If agreement cannot be reached, parties may engage in a formal dispute resolution process – see summary below.
Further rent re-negotiation
Given the time lapsing between the National Cabinet's announcement of the Code and the commencement of the Regulation, there are likely to be many landlords and tenants who have acted promptly and have agreed to variations of leases in anticipation of the Regulation. It is important to be aware that any such variations remain valid, even if the agreed rent relief and the terms are inconsistent with the Regulation. Additionally, nothing in Regulation will prevents the parties from entering into an agreement that is inconsistent with the Regulation moving forwards, if an alternate arrangement can be agreed.
However, all parties need to be aware that a party may seek to have the terms of any agreement re-negotiated in two circumstances:
- where an agreement is made prior to the commencement of the Regulation – there is nothing prohibiting a party from initiating negotiations for a variation that is consistent with the Regulation; and
- where one party seeks to negotiate a further reduction in rent during the response period -, where there is a material change of a ground upon which the agreement is based a party has a right to seek a further rent reduction. For example, if the tenant's turnover was based upon an estimated turnover and the actual turnover is materially less than the estimate, the tenant may seek a further rent reduction. Note that this provision is not reciprocal and does not allow for an increase in rent if circumstances are materially better than those anticipated by the variation entered into.
Practical tip: One way to provide the parties with certainty is to negotiate rent relief that is based upon actual reduction in the turnover for each month during the response period. This may be done by altering the payment of rent to be a month in arrears or alternatively to insert a mechanism to carry out a "wash up" based upon actual turnover (in a similar manner to the way outgoings are generally paid).
Any rent deferrals agreed to between the parties under the negotiation framework must:
- not require payment of the deferred rent prior to 1 October 2020;
- require deferred rent to be paid off over a period of at least 2 years but no more than 3 years; and
- not require the tenant to pay interest on deferred rent, unless the tenant fails to comply with the conditions on which the rent is deferred.
Despite the conditions of the lease, the Regulation automatically allows the landlord to retain any bank guarantees or other security until the rent deferral period ends and the deferred rent is fully repaid (in the event that the lease expires prior to the repayment obligations).
Practical tip: Landlords looking to negotiate a rent deferral should check expiry dates on bank guarantees to ensure that they extend to cover the entire deferral period. If not, the requirement to provide replacement bank guarantees should be included in the variation.
Where rent is deferred or waived by a landlord under the negotiation framework, the landlord must offer the tenant an extension of lease for the same period in which rent is waived or deferred.
However, if the landlord is subject to an existing legal obligation that is inconsistent with the extension, or the landlord can demonstrate that the landlord intends to use the lease premises for a commercial purpose of the landlord, the landlord is not obliged to extend the lease. This exception may assist:
- landlords who have already found replacement tenants and have entered into binding arrangements; or
- government entities who have a legal commitment to use the leased premises for their construction projects (ie. in the event of a resumption and lease back arrangement) where the extension is inconsistent with those obligations.
Restriction on enforcement of leases
Rent freeze for affected leases during recovery period
A landlord under an affected lease must not increase the rent payable by the tenant during the response period.
The Regulation has confirmed that if a rent review is scheduled during the response period, the landlord may still conduct the rent review, but must not give effect to a rent increase until 1 October 2020.
Restrictions on exercising landlord rights during recovery period
The default position is that a landlord under an affected lease must not take a "prescribed action" against the tenant based on a failure by the tenant to pay rent or outgoings during the response period or to remain open during required business hours, unless an exception applies.
"Prescribed actions" include:
- terminating a lease or taking eviction action;
- initiating court or tribunal proceedings to exercise or enforce a right by the landlord under the lease
- claiming damages;
- making a claim on a bank guarantee, indemnity or security deposit for unpaid rents or outgoings;
- charging interest; or
- enforcing a right of the landlord under the lease.
When can a landlord take a "prescribed action"?
The Regulation confirms that a landlord may take prescribed action if the failure to pay rent, outgoings or remain open did not occur during the response period, or if the breach was not related to the effects of the COVID-19 emergency.
This will mean that a landlord could enforce its rights for arrears or other breaches relating to the period prior to 29 March 2020, or for a breach unconnected to COVID-19 committed by the tenant during the recovery period (such as wilful damage to the premises).
Additionally, a landlord under an affected lease may take a prescribed action:
- where the prescribed action is agreed to by the parties during negotiation or mediation;
- pursuant to a court or tribunal order; or
- the tenant has substantially failed to comply with the tenant’s obligations to negotiate, despite a genuine attempt to by the landlord to negotiate rent payable and other conditions of the lease.
Practical tip: If a landlord intends calling on a Bank Guarantee during the response period, contact the relevant bank or financial institution first to determine if they have any additional requirements during the response period (as some banks have additional information and documentation requirements during the current crisis).
Dispute resolution framework
Legal action in a court or tribunal commenced by landlords between 29 March 2020 and 28 May 2020 for a "prescribed action" must be put on hold until after 30 September 2020.
During the response period, if parties to an affected lease cannot reach agreement by way of negotiation, then either party may submit a Dispute Notice to the Office of the Small Business Commissioner. The Commissioner will then appoint a mediator, who will formally mediate the dispute in accordance with the procedure set out in the Regulation.
A person may only apply to QCAT for relief in respect of an "eligible lease dispute" under the Regulation if:
- the parties to the dispute cannot reach a settlement agreement under mediation through the Commissioner;
- a party to the dispute does not attend the mediation conference for the dispute and does not have a reasonable excuse;
- the dispute is not settled within 30 days after the dispute notice is given to the Commissioner; or
- a party to a settlement agreement claims that another party to the agreement has not complied with the agreement within the period stated in it or, if no period is stated, within 14 days after the agreement is signed.
There is also a time limit for the filing of any applications to QCAT and a party must make an application within 6 months from the later of the day on which an affected lease ends, or the last day the tenant was required under an agreement to pay deferred rent.
Now that the Regulation is in force and all parties have greater clarity it's time for landlords and tenants who have not already done so to communicate with each other, share information and navigate the negotiation framework to agree on lease variations to assist the parties to manage the impacts of COVID-19. If you need assistance with preparing variations that are consistent with the Regulations, our team is ready to assist.