The Queensland Government has introduced Regulations under the COVID-19 Emergency Response Act 2020, in response to the mandatory Code of Conduct for Commercial Leasing (Code) released by the Australian Government on 3 April 2020.
The Code, which was announced following the shutdown measures that commenced on 23 March 2020, stipulates the basis upon which parties to a commercial lease should seek to negotiate rent payable in circumstances where the tenant business has been adversely affected by COVID-19.
More recently, on 28 May 2020, legal effect was given to many of the principles in the Code in Queensland with the implementation of the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Regulations).
The Regulations are reflective of the principles in the Code and provide minimum protections for tenants in a commercial lease during the pandemic. Additionally, the Regulations provide a framework for the way negotiations should be approached and provide a process for dispute resolution in the event landlords and tenants cannot agree.
Currently, the Queensland Government has advised that the Regulations will remain in effect until 30 September 2020; however, this date may be extended.
To be entitled to the protections under the Regulations, a lease must be deemed an ‘Affected Lease’ and meet all the following criteria:-
- It is a retail shop or commercial lease of a premises where the tenant carries on business or is a non-profit body in the current financial year;
- It was current when the Regulations commenced (28 May 2020);
- The tenant’s turnover was less than $50 million for the 2018–19 financial year or is likely to be under $50 million for the 2019–20 financial year (ie. the tenant is a small medium enterprise [SME] entity); and
- The tenant is eligible for, but not necessarily enrolled in, the JobKeeper Payment scheme.
The Regulations extend to franchisees notwithstanding that it may be the name of the franchisor that is noted as tenant under the lease, as well as non-profit bodies. Leases for farming businesses, however, are excluded.
Minimum protections for tenants
During the ‘Response Period’ (currently defined as 29 March to 30 September 2020), tenants in an Affected Lease:-
- May not be evicted or have their lease terminated for non-payment of rent or outgoings;
- May not have their rent increased;
- May not be penalised for reducing trading hours or not opening;
- May not have their bank guarantee or security deposit accessed by their landlord for unpaid rent or outgoings; and
- Most notably, may request to negotiate rent payable (as well as other terms of the lease) in response to which a landlord must offer to reduce the rent, provided sufficient information has been received in support of the request.
Once sufficient information has been supplied, a landlord must respond to a tenant’s request to reduce rent within 30 days.
Importantly, a minimum of 50% of any reduction in rent offered must be by way of a complete waiver, with the remaining percentage to be deferred (ie. to be paid by the tenant after the Response Period has ended).
Deferred rent is to be amortised (repaid) over a period not less than 2 years and not exceeding 3 years. A landlord may continue to hold any security deposit until all deferred rent has been repaid however no additional fees or interest may be added to the deferred amount.
A landlord must also offer to extend the lease term for the equivalent period of any rent waiver or deferral on conditions favourable to the tenant – except where the landlord has an inconsistent pre-existing legal obligation or otherwise intends to use the premises for their own commercial purpose.
Penalties are imposed for breaches of confidentiality in respect of information exchanged or agreements reached under the application of the Regulation (maximum penalty: 20 penalty units).
Agreements negotiated prior to 28 May 2020 still stand; however, they may be re-negotiated if either party considers a more attractive outcome to be available under the Regulations.
Rights and obligations when negotiating rent reductions
The Regulations require parties to co-operate, act reasonably, and act in good faith. In this regard, they mirror the principles contained in the Code.
Requests to negotiate rent must be made in writing to the other party and include sufficient information in support of the request that is true, correct and not misleading.
In undertaking negotiations, the parties must consider the following factors:-
- All the circumstances of the tenant (including but not limited to any reduction in turnover) as well as the circumstances of the Affected Lease;
- Whether the tenant’s ability to comply with its obligations under the lease in the longer term will be affected if the rent is not reduced during the Response Period;
- The landlord’s financial position;
- Any reduction in or waiver of outgoings available by virtue of other Government assistance measures (ie. land tax, local government rates, statutory charges, insurance premiums);
- Any requirement to undertake further negotiations in the event circumstances change; and
- The leasing principles contained in the Code.
Dispute Resolution if Landlords and Tenants cannot agree
The Regulations require landlords and tenants to attempt to resolve any dispute themselves in the first instance.
However, if this is not possible, the Regulations allow either party to refer their dispute for Mediation. This involves the giving of a Dispute Notice to the small business commissioner (Commissioner).
The Commissioner may then either accept or reject a dispute notice. If accepted, a Mediation conference will be arranged and attendance by all parties to the dispute will be mandatory. If a party fails to attend a Mediation, they may be subject to an order that they pay the other party’s costs thrown away in respect of the Mediation.
Legal representation at Mediation is only allowed with the prior consent of the appointed mediator.
Parties may request the attendance of a third party (such as a property agent or business manager) if the mediator is satisfied their attendance may assist in resolving the dispute.
Any settlement reached following a Mediation conference must be recorded in writing.
If Mediation fails to resolve the dispute, the parties may refer their dispute to the Queensland Civil and Administrative Tribunal (QCAT). A monetary limit of $750,000.00 applies.