Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020

WHO SHOULD READ THIS

• Landlords and SME tenants of retail and commercial leases in Queensland.

THINGS YOU NEED TO KNOW

• The Queensland Government released Regulations on 28 May 2020, implementing the National Code.
• While based on the Code, the Regulations differ in a number of ways, and significantly alter the rights and obligations of both landlords and tenants of retail and commercial leases.
• The Queensland Government have set up the Small Business Commissioner, who has created a webpage with information relating to the new Regulations.

WHAT YOU NEED TO DO

• Landlords should familiarise themselves with the Regulations and requirements under it, to ensure they act in accordance with these requirements.
• Tenants should assess their position and negotiate with landlords in a manner required by the Regulations.
• Contact us if you have any questions regarding the Regulations or require assistance understanding the rights and obligations under the Regulations.

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Background

On 7 April 2020, the National Cabinet released the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (Code).  The Code, which we summarised here, provided for ‘broad brush’ provisions relating to retail and commercial leases including prohibiting certain enforcement action by landlords against tenants under their leases.

On 28 May 2020, after extensive industry and stakeholder consultation, the Queensland Government released the much anticipated Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Regulations), made under the COVID-19 Emergency Response Act 2020 (Act). 

The Regulations implement the Code in Queensland and go some way towards balancing the interests of landlords and tenants, departing in some respects from the Code and regulations made in other states. 

In this alert, we provide answers to some of the key questions arising out of the Regulations.

Key definitions

There are a number of key definitions used in the Regulations, summarised below (and used in this alert):

Affected lease

An affected lease is a lease where:

• the lease is a retail shop lease, or a lease for carrying on a business;
• the lease is binding on the tenant as at 28 May 2020 (whether or not it has commenced);
• the tenant is an SME entity (generally <$50 million turnover in FY 2018/19 or likely to be <$50 million in FY 2019/20); and
• the tenant (or affiliates in certain circumstances) is eligible for the JobKeeper Payment scheme.

If the tenant of an affected (sub)lease is a franchisee, a lease under which the franchisor is lessee of the premises occupied by the franchisee is also an affected lease.

Most farming, agricultural and pastoral leases are excluded from the operation of the Regulations.

Prescribed action

Prescribed action is an action under a lease or agreement, or the starting of a proceeding in a court or tribunal, for any of the following:

• recovery of possession, exercising a right of re-entry or forfeiture;
• termination of the lease or eviction of the tenant;
• seizure of any property, including for the purpose of securing payment of rent;
• damages;
• the payment of interest on, or a fee or charge relating to, unpaid rent or outgoings;
• a claim on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings;
• the performance of an obligation by the lessee or another person under a guarantee under the lease; or
• exercising or enforcing another right the by the landlord under the lease or other agreement.

Response period

The response period is the period commencing 29 March 2020 and ending 30 September 2020.

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Key questions and answers

What leases are impacted by the Regulations?

The Regulations apply to the parties under an affected lease.

What protections (for tenants) or restrictions (for landlords) do the Regulations provide?

The Regulations prohibit a landlord of an affected lease from taking any prescribed action on the grounds of:

• a failure to pay rent for a period occurring wholly or partly during the response period; or
• the tenant not operating the business during the hours required under the lease during the response period.

However, a landlord can take prescribed action in relation to an affected lease if:

• it is in accordance with an agreed variation made under the Regulations;
• it is in accordance with a settlement agreement or other agreement entered into between the landlord and tenant in relation to rent, outgoings or business hours;
• it is in accordance with an order of a court or tribunal;
• it is on a ground that is not related to the effects of the COVID-19 emergency; or
• the landlord has made genuine attempts to negotiate in accordance with the Regulations and the tenant has substantially failed to comply with their obligations to participate in the negotiations in good faith and to act cooperatively to attempt to reach agreement.

Is there a rent freeze?

Yes, during the response period. 

However, any rent review that is due to occur during the response period can still occur, but a landlord must not give effect to the rent increase until the response period ends.

Can parties contract out?

Yes, the parties can enter into an agreement that is inconsistent with Part 2 of the Regulations (the substantive provisions, except for dispute resolution), and the Regulations do not affect an agreement already reached between the parties.  However, notwithstanding this, either party is entitled to seek to negotiate as provided for under the Regulations.

How are negotiations for lease variations required to be conducted?

The Regulations set out detailed arrangements for the conduct of negotiations, which must be followed by landlords and tenants.  These are summarised below, but as a guiding principle require the parties to act reasonably, in good faith and in a transparent manner.

• Either party to an affected lease may request (in writing) that the other party negotiate the rent under and other stated conditions of the lease.
• The parties must, as soon as practicable, give each other information relating to the request that is:
  • true, accurate, correct and not misleading; and
  • sufficient to enable the parties to negotiate in a fair and transparent way.
    
    The Regulations list examples of such information, including a clear statement about the terms which the party seeks to negotiate and, for tenants, a statement demonstrating why the lease is an affected lease, accompanied by supporting information and evidence.
• Within 30 days of receiving the information, the landlord must make an offer in relation to a reduction of rent and changes to other conditions. The offer must:
  • relate to any or all of the rent payable during the response period;
  • provide no less than 50% of the rent reduction offer in the form of a waiver of rent; and
  • have regard to:
    • all the circumstances of the tenant and the affected lease including the reduction in turnover experienced by the tenant;
    • the extent to which a failure to reduce rent would compromise the tenant’s ability to comply with their obligations under the lease;
    • the landlord’s financial position, including any financial relief provided to the landlord as a COVID-19 response measure; and
    • where any portion of the rent or other amount payable under the lease represents land tax, rates,  statutory charges, insurance premiums or outgoings for which the landlord has received a reduction or waiver, the amount payable.
• Once the offer is received, the parties must cooperate and act reasonably and in good faith in negotiating a reduction in the amount of rent payable under the lease for the response period.  The agreement can be documented by way of variation or other agreement (for example, a deed).

How will rent deferrals work?

The Regulations establish certain rules in relation to the operation of rent deferrals, where the parties have agreed to a rent deferral.  In particular:

• repayment cannot be required until the day after the response period ends;
• repayment must be over an agreed period of between 2 to 3 years;
• no interest, fee or charge may be imposed on the deferred rent amount (unless the tenant does not repay the deferred rent in compliance with the negotiated lease variation); and
• notwithstanding the conditions of the lease, the landlord may continue to hold any security under the lease until the deferred rent is repaid (to secure the repayment of the deferred rent).

Will leases be automatically extended?

If there is an offer to reduce or defer rent, a landlord must offer a lease extension for the same length of time as the reduction or deferral is effective, on the same terms as the existing lease.

There are exceptions to this, where the landlord is subject to an existing legal obligation inconsistent with the extension (for example, where the landlord has granted a new lease to commence during such period or if the landlord demonstrates that they intend to use the premises for their own commercial purposes).

If circumstances that led to a rent reduction being agree have changed materially, can the agreement be renegotiated?

Yes, this is expressly permitted by the Regulations.  However, importantly, in any subsequent negotiations the landlord is not required to provide at least 50% of rent reduction by way of waiver – this may be an amount wholly deferred or accounted for in another way.

What if the parties cannot reach agreement?

If attempts to negotiate lease variations are unsuccessful, either party may refer the matter to the Small Business Commissioner to mediate.  This can be done regardless of the dispute resolution processes stated under the lease.

The Regulations set out detailed requirements for starting and conducting mediations, including as to notices, representation and liability for costs (though the costs of the mediator and the mediation conference are covered by the Small Business Commissioner).

Failing successful mediation, the parties may instigate proceedings in QCAT or a court of competent jurisdiction.  There are strict requirements and timeframes in relation to this, and specific advice should be sought.

What other impacts do the Regulations have on leases?

The Regulations confirm that any act or omission of a tenant under a retail shop lease, prescribed lease or other small business lease is not a breach of the lease where it occurs after 23 April 2020 and is required under a COVID-19 response measure, or a law of the Commonwealth or a State in response to the COVID-19 emergency.

Where a tenant of an affected lease is unable to operate their business at the premises because of the COVID-19 emergency, the landlord may cease or reduce services at the premises to the extent reasonable and subject to any reasonable request by the tenant.

What happens to actions started before the Regulations were released?

If a landlord has taken a prescribed action against a tenant of an affected lease after 29 March but before 28 May, the action will be valid unless it is not completed, finalised or resolved (as the case may be).  Otherwise, it will be stayed or suspended until after the response period.  Landlords should seek specific advice on any such actions.