Commercial Leasing Code

The Queensland Government has now enacted the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (referred to in this update as the “Regulations“), which was expected to legislate for the State of Queensland the National Cabinet’s ‘Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19’ (referred to in this update as the “National Cabinet Code“).

The Regulations do implement the National Cabinet Code in large part, however, there are a couple of key areas in which the Regulations depart from the principles in the National Cabinet Code.

We summarise the Regulations as follows:-

The Regulations are largely written to force landlords and tenants to negotiate in good faith the reduction of rent during the COVID-19 response period. The Regulations state clearly that landlords and tenants must cooperate and act reasonably and in good faith in all discussions and actions associated with mitigating the effect of the COVID-19 emergency. If an agreement cannot be reached by the parties, the Regulations also set out a process for resolving disputes through mediation.

The ‘COVID-19 response period’ starts on 29 March 2020 and will end on 30 September 2020 (just over 6 months).

For the Regulations to apply:-

The lease needs to be either a ‘retail shop lease’, or a lease in which ‘business’ is undertaken, or a lease in which a non-profit entity carries on the operations or activities of its enterprise; and
On 28 May 2020, the lease was binding on the tenant, whether or not the lease had commenced; and
The tenant is a SME entity (small to medium enterprise) – that is, an entity which has annual turnover of less than $50 million; and
The tenant under the lease, or an entity connected with or an affiliate of the tenant which has staff employed for the business at the leased premises (such as a franchise situation), is eligible for the JobKeeper scheme.

If a tenant fails to pay

If a tenant fails to pay rent or outgoings, or fails to carry on its business at the leased premises as required by the lease, during the response period, the landlord will not be entitled to terminate or forfeit the lease, exercise a right of re-entry, charge interest or other penalties, claim on a security bond or other security, or exercise rights pursuant to a guarantee.

However, the restraint on the landlord summarised at point 4 will not apply if:-

The landlord has genuinely attempted to negotiate rent payable and other conditions of the lease, and the tenant has substantially failed to comply with the tenant’s obligations with respect to the negotiations;
If a variation of the lease has been agreed to or a settlement agreement entered into which the tenant fails to comply with; and/or
The tenant’s failure to comply with the terms of the Lease is unrelated to the effects of COVID-19.

In addition to the restraints set out at point 4, landlords will not be entitled to give effect to any rent increases during the response period (and are not entitled to accrue the sum of the rent increases for payment after the response period ends). That means that the earliest date that any rent increases can take effect will be 1 October 2020.

Rent negotiations

When negotiating the rent payable and other conditions of the lease, either the landlord or the tenant need to request in writing that a negotiation take place. Both the landlord and the tenant are required to give to each other information relating to the negotiation which is true, accurate and not misleading, and which is sufficient to enable the parties to negotiate in a fair and transparent way. In the majority of cases, this will require the tenant to give evidence (for example) of the tenant’s eligibility or participation in the JobKeeper scheme, accurate financial information together with supporting evidence, turnover information, information about any steps the tenant has taken to mitigate the effects of the COVID-19 emergency (such as assistance received from governments), information of any concessions or benefits given to the tenant/franchisee by a franchisor, etc.

Within 30 days after sufficient information about a request to negotiate is received (which in the majority of cases will be when the tenant has given sufficient information to the landlord), the landlord must make an offer to the tenant for a reduction in the amount of rent payable, and any other proposed changes to the conditions of a lease.

The landlord’s offer must relate to the rent payable during the response period. Any rent reduction offered must include no less than a rent 50% waiver of rent (for instance, if the landlord’s offer was for a 40% reduction in rent, 20% of the rent reduction must be waived). The offer must have regard specifically to all of the relevant circumstances, including the tenant’s circumstances, the reduction in turnover at the leased premises experienced by the tenant, the extent to which the tenant’s ability to comply with the lease obligations would be affected if rent relief were not provided, the landlord’s financial position (taking into account financial relief available to the landlord as a COVID-19 response measure), and the reduction/waiver of government rates, taxes and charges available to the landlord.

The parties must then cooperate and act reasonably and in good faith to reach an agreement. If a ground on which the agreement is based changes in a material way after an agreement is reached (for instance, the tenant’s turnover does not increase as significantly as anticipated, of the tenant’s income decreases), then the agreement can be re-negotiated, in which case the parties start the process of negotiation over again.

Deferred or waived rent agreement

If agreement is reached for rent to be deferred, then the deferred rent is not payable until the end of the response period (i.e. from 1 October 2020), and must be amortised (broken into instalments) using a method agreed between the parties over a period of no less than 2 years and no more than 3 years. No interest or other penalty can be applied to the deferred rent. The landlord shall be entitled to hold any security bond until the whole of the deferred rent has been paid.

If rent is waived or deferred, the landlord is also obliged to offer the tenant an extension to the term of the lease equal to the period in which rent has been waived or deferred. In other words, the lease extension would be for a maximum of 6 months and a couple of days. An obligation to extend the lease will not apply where the landlord is subject to an existing obligation that would prevent the extension (for instance, a new lease for the leased premises has been entered into), or the landlord demonstrates that the landlord intends to use the leased premises for a commercial purpose following the lease expiry.

If agreement cannot be reached and a dispute arises, either party may apply to the Queensland small business commissioner for a mediation to take place. If mediation is unsuccessful in settling the dispute, then either party may commence proceedings before QCAT or a court.

The Regulations are distinguishable from the National Cabinet Code in that:-

There is no obligation or rule that where the tenant’s turnover reduces by a certain amount (for instance, a tenant’s turnover may have decreased 100% or 60% year-on-year), then the rent is required to be reduced by that same amount. The Regulations leave the amount of any rent reduction to be agreed by the parties.

There is no obligation or rule that where the rent is reduced by a certain amount, that half of the rent reduction is to be ‘deferred’ (though the parties can agree to a rent deferral should they choose). There is, however, an obligation that any rent reduction agreed needs to include no less than 50% as a waiver of rent.

Do you have questions?

If you want assistance with respect to negotiating your lease rent payments or other conditions, whether you are a landlord or a tenant, please do not hesitate to contact the solicitors at ABKJ Lawyers who are ready to help you. You can get in contact by email at djm@abkj.com.au or phone the Southport office on 07 5532 3199.

For further help, read our articles on Property Law: