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

It has been almost 2 months since the National Cabinet announced the Code of Conduct and finally, the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (the Regulations) came into effect on 28 May 2020. The purpose of the Regulations are to give effect to the good faith leasing principals in Code of Conduct, however they do not simply adopt the code, as some jurisdictions have done. Nor do they prevent the parties from reaching an agreement outside of or inconsistent with the Regulations.

The Regulations apply to an affected lease, which means;

A retail shop lease or a lease of a premises used for carrying on a business;
The lease is binding on the tenant, regardless of whether the lease has commenced on 28 May 2020;
The tenant’s turnover was less than $50 million for the financial year of 2018-19 or is likely to be less than $50 million for the financial year of 2019-20;
The tenant (or an associated entity to the tenant who employs staff) is eligible (they do not need to be participating) for the Jobkeeper Payment scheme (Jobkeeper).

Generally the Regulations will apply for to the response period, which is the period between 29 March 2020 and 30 September 2020.

Rent negotiations

Stage	Action	Landlord/Tenant
1	Request and commence negotiation	Either party may write to the other party requesting to negotiate the rent and any other terms to their existing lease – we expect that this will generally be a request from the tenant. This needs to include a clear statement about what is to be changed – for example, the rent amount, the payment timing (changing payment in advance for the month to arrears), lease term, outgoings, or hours of operation.
2	Share information	Both parties are to present information for the other party to assess the position and negotiate. This needs to include: · Financial information or statements about turnover; · Information to show that the tenant is an SME entity; · Evidence of eligibility or participation in Jobkeeper; · Information about steps taken to mitigate. This is not an exhaustive list and the information provided needs to be sufficient to allow a fair and transparent negotiation.
3	Landlord to present offer	Within 30 days of receiving sufficient information, the landlord must: · Respond to the tenant by offering a rent reduction; and · Propose changes to the lease conditions (if necessary). The offer by the landlord must provide for no less than 50% of the rent reduction to be by way of waiver. It should also reflect any reduction in outgoings and generally have regard to the tenant’s reduction in turnover. However the offer may also take into consideration the landlord’s financial position and generally have regard to all relevant circumstances. Whilst the Regulations do not require the landlord’s offer to correlate to the reduction of turnover, we expect that this is what is likely to happen in practice. The landlord must also offer the tenant an extension to the term of the lease (equivalent to the period for which the rent is waived/deferred) (there are some exceptions to this requirement if the landlord has existing obligations or requires the property for their own commercial purpose).
4	Negotiate	Once the tenant receives the offer from the landlord, both parties can commence negotiations. The parties must cooperate and act reasonably and in good to negotiate a reduction in the amount of rent payable for the response period. If there is a material change to the basis on which an agreement was reached (e.g. the tenant’s income decreases substantially) the parties may negotiate a further reduction.
5	Try and reach an agreement	If an agreement is reached this can be recorded by a variation to the lease or another agreement between the parties. The parties may enter into an agreement that is inconsistent with the Regulations.
6	Mediation (If no settlement is reached)	If the parties are unable to reach an agreement, a dispute notice (in the approved form) will be provided to the Queensland Small Business Commissioner (SBC). The SBC must nominate a mediator to mediate the lease dispute and: · The mediation conference to be held 7 days after the notice is given; · There should be no legal representative unless the mediator approves for a lawyer to be present; · The mediation conference is held in private; · Evidence of anything said in a mediation conference is not admissible before a court or tribunal; · Each party to pay their own costs for the mediation conference (but the SBC is to pay for the mediator); · Parties can then have the right to apply to QCAT if a settlement agreement cannot be reached.

Rent deferrals

Any deferred rent:

Must not be required to be repaid until the end of the response period;
Should be repaid over a period of at least 2 years, but not more than 3 years; and
Should not result in the tenant paying additional costs (such as interest or any other fees or charged) unless the tenant fails to comply with the terms of the rent deferral.

The landlord is entitled to retain any security deposit already held until such time as the deferred rent is repaid (even if the lease has come to an end). If this occurs, a landlord should check the expiry date of any bank guarantees held.

Rent Increases

A landlord must not increase the tenant’s rent during the response period. If a usual rent review was due, the rent may still be reviewed but that cannot take effect until the end of the response period.

Reduction in services

If the tenant is unable to operate a business at the premise because of Covid-19, the landlord may stop or reduce any service at the premises as long as it is reasonable to do so in the circumstances and subject to any reasonable request by the tenant. This may assist to reduce outgoings for both the landlord and the tenant.

What if an agreement has already been reached?

Given the time passed since the first announcement by the Prime Minister, it is possible that many parties have already reached an agreement about their lease arrangements. These agreements can remain in place if the parties are agreeable, or they can be revisited under the Regulations.

Other actions under an affected lease

The Regulations prohibit certain prescribed actions, which include – an action under a lease (or any other agreement) to do any of the following:

To repossess the premise or exercise a right to re-enter the premises;
Terminate the lease;
Evict the tenant;
Seize any property to secure payment of the rent;
Forfeiture (e.g. to forfeit the tenant’s benefit under the lease as a penalty for a wrongdoing under the lease) or seek damages;
To charge interest on unpaid rent or outgoings;
To claim on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings;
To compel specific performance from the tenant or its guarantor; and/or
Any other right by the landlord under the lease relating to the leased premise.

A landlord, during the response period, can only take a prescribed action against a tenant if:

It is on a ground that is not related to the effects of the Covid-19 emergency; or
It relates to the breach of a variation agreement that the parties have reached in accordance with the Regulations; or
Despite genuine attempts by the landlord, the tenant has substantially failed to comply with its obligations to negotiate rent payable and other conditions of the lease.

Where to now?

If an agreement has not already been reached and you are a tenant, you should make the initial request in writing to your landlord as soon as possible. You should err on the side of caution and provide as much information as you can and be specific about what you are requesting. Please let us know if we can assist in framing this request to comply with the Regulations.

If you are a landlord expecting, but yet to receive, a request from your tenant, you do not have to invite your tenant to make that request. You are entitled to initiate the process yourself, or you could consider making a list of the information you would like from your tenant so that when a request is made you are prepared.

It is then a matter of reaching a commercial agreement. We would suggest that any agreement be documented (in some form) between the parties. Where the lease is registered and the agreement involves an extension of the term, you should get in touch with us to assist to prepare the required amendment of lease, capable of registration.

As each lease and business situation will be different, please take out comments as general guidance and contact Mahoneys to obtain timely and practical legal advice on the actual issues you are facing.

Written by Amy O’Donnell

Written by Amy ODonnell

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