Queensland Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020Jun 2020 | Commercial Property
COVID-affected commercial leasing - Part 2
The Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Regulation) came into effect in Queensland on 28 May 2020. The Regulation implements the National Cabinet Mandatory Code of Conduct – SME commercial leasing principles during COVID-19 (Code) and applies to lease arrangements between 29 March 2020 to 30 September 2020.
The main purposes of the Regulation is to mitigate the effects of the COVID-19 pandemic on landlords and tenants under affected commercial and retail leases and to establish a process for resolving small business tenancy disputes and affected lease disputes.
The Regulation is made under s 23 of the COVID-19 Emergency Response Act 2020 (Act) and expires on 31 December 2020. However, the Regulation has the potential to regulate landlord and tenant conduct well after businesses have resumed normal operations after lock down conditions are eased.
While the Regulation provides a framework for parties to an affected lease in Queensland as a guide in negotiating lease variations between the parties, there are still some areas of uncertainty as to how some of these provisions will apply in Queensland.
What type of leases does the Regulation apply to?
Section 23 of the Act allows for regulations to be made under either the Act itself or the Retail Shop Leases Act 1994 (Qld) in relation to a ‘relevant lease’ in response to the COVID-19 emergency.
Section 5 of the Regulation provides that a lease of premises is an ‘affected lease’ if it is a retail shop lease or a prescribed lease (being a lease prescribed as a relevant lease under s 6) and the lease (or an agreement for lease) is in effect on the commencement, the tenant is an SME entity and either the tenant, or an entity that is connected with, or an affiliate of, is eligible for the JobKeeper Scheme.
Section 6 of the Regulation provides for s 23(8) of the Act, definition of ‘relevant lease’, paragraph (b), means a lease, other than a retail shop lease, under which the lease premises are to be wholly or predominantly used for carrying on a business is prescribed.
While the Regulation applies to retail shop leases and certain commercial leases, it also applies to certain agreements for lease and therefore has application broader than was initially contemplated by the National Cabinet.
An ‘affected lease’ will extend to one where the franchisor is the tenant of the premises occupied by the franchisee (although the drafting of this provision in sub-s 5(2) is questionable, the intent is clear). There are limited exceptions to the definition of an affected lease relating to some farming business leases and certain leases under the Land Act from the State.
What exactly does the Regulation do and how does it apply to existing leases?
Parties must co-operate, act reasonably and in good faith
The Regulation requires that parties to an ‘affected lease’ must co-operate, act reasonably and in good faith in all discussions and actions associated with mitigating the effects of the COVID-19 pandemic on parties to the lease.
Landlords must not take prescribed action
The Regulation provides that a landlord under an affected lease must not take ‘prescribed action’ during the ‘response period’, being the period from 29 March 2020 to 30 September 2020.
A ‘prescribed action’ includes an action under a lease for recovery of possession, termination of the lease, eviction of the tenant, exercising a right of re-entry, seizure of any property, forfeiture, damages, payment of interest, fees or charges relating to unpaid rent or outgoings, a claim on a security for unpaid rent or outgoings, performance of an obligation by the tenant or any guarantor or exercising any other right by the landlord under the lease (s 9).
There are certain exceptions under s 12 enabling a landlord to take prescribed action in limited circumstances, including on grounds not related to the effects of the COVID-19 emergency.
Landlords must not increase rent
Additionally, a landlord under an affected lease must not increase rent payable during the response period, unless the parties agree in writing. If a lease provides for a rent review during the response period, the landlord may review the rent but generally it must not give effect to an increase in rent until the response period ends. A landlord may, however, give effect to a rent increase calculated by reference to the turnover of the business carried on at the lease premises.
Obligations for renegotiating outcomes
A party to an affected lease (the ‘initiator’) may, in writing, ask the other party to negotiate the rent payable or other conditions under the lease and the parties must negotiate the conditions of the lease and comply with ss 14 and 15 of the Regulation. Section 14 requires production of information, and s 15 provides that the landlord must offer the tenant a reduction in rent and any proposed changes to conditions within certain parameters. The offer, amongst other things, must provide for no less than 50% of the rent reduction offered to be in the form of a waiver of rent and have regard to all the circumstances of the affected lease and the tenant (including any reduction in the tenant’s turnover), and the landlord’s financial position. While the Code provides that any rent reductions offered by the landlord must be proportionate to the reduction in the tenant’s trade during the response period, the Regulation requires that a range of factors to be considered, including the landlord’s own financial position. The Regulation does not include clear provisions directing guarantors to be bound by an agreement between the landlord and tenant.
If the parties to an affected lease agree to defer payment of an amount of rent, the variation of the lease must not require payment of the deferred rent to commence until after 30 September 2020, it must require payment of the deferred rent to be amortised over a period of at least two years but no more than three years and it must not require the tenant to pay interest, fees or charges in relation to the amount of deferred rent (unless the tenant fails to comply with the conditions on which the rent is deferred). If a tenant's financial circumstances change further after an agreement has been reached for a variation to the lease (but before 30 September 2020), they can make another request to their landlord for a rent reduction.
Extension of lease
If rent under an affected lease is waived or deferred for a period, generally the landlord must offer the tenant an extension to the term of the lease equal to the period for which rent would have been payable if it had not been waived or deferred and on the same conditions relating to payment of rent in effect prior to the Regulation (other than as adjusted for the waiver or deferral) and otherwise on conditions no less favourable than the conditions in effect prior to the Regulation.
Parties must share sufficient information
The landlord and tenant must share ‘sufficient information’ that that allows both parties to negotiate in a fair and transparent way. The information must be ‘true, accurate, correct and not misleading’. Section 14 contains examples of sufficient information such as a clear statement about the terms of the lease the initiator is seeking to negotiate, a statement by the tenant that demonstrates why the lease is an affected lease, accompanied by supporting information and evidence such as an accurate financial information or statements about the turnover of the tenant’s business or information demonstrating that the tenant is an SME entity under s 5 or evidence of the tenant’s eligibility for the JobKeeper scheme.
Part 3 of the Regulation applies in relation to affected lease disputes and small business tenancy disputes (each an ‘eligible lease dispute’).
If a landlord and tenant cannot come to an agreement, mediation services are available through the Office of the Queensland Small Business Commissioner (QSBC). Retail shop lease disputes on or after 28 May 2020 are dealt with by the QSBC mediation process until 30 September 2020.
If a landlord started legal proceedings against a tenant before 29 March 2020 and later the tenant lodges a dispute notice with the QSBC, generally those proceedings can continue. If a landlord started proceedings or a prescribed action against a tenant with an affected lease between 29 March 2020 and 28 May 2020, those proceedings must be put on hold until after 30 September 2020. If a tenant lodges a dispute notice with the QSBC after 28 May 2020, and later the landlord starts legal proceedings against the tenant, those proceedings are generally put on hold until the mediation process administered by the QSBC is completed.
If the parties to a dispute cannot reach a settlement agreement, either party can apply to Queensland Civil and Administrative Tribunal for an order to resolve the dispute.
Most Queensland commercial tenants and landlords affected by the COVID-19 pandemic would likely have commenced negotiations towards lease variations prior to the making of this Regulation. Now the Regulation has been made, a binding legal framework is in place to guide those negotiations in Queensland. However, the Regulation is quite complex in how it may apply to a variety of leasing circumstances. Prior lease variations which are inconsistent with the Regulation are permitted, but will not prevent a party from seeking to re-negotiate a lease in accordance with the Regulation.
Before commencing or continuing lease negotiations in relation to rent payable or other conditions, landlords and tenants need to be aware of the Regulation and how it alters the parties’ respective rights and obligations under affected leases. Both parties must co-operate and act reasonably and in good faith when negotiating. A landlord under an affected lease must not take prescribed action, including enforcing their rights under the lease, during the period from 29 March 2020 to 30 September 2020. While at least 50% of the rent reduction offered by a landlord must represent a waiver, the offer must have regard to all the circumstances of the affected lease, including the landlord’s own financial position as well as that of the tenant. Landlords and tenants of eligible leases should be aware of the dispute resolution service that is available through the QSBC.
All agreements to vary leases in accordance with the Regulation (or independently of it) should be documented in writing as a binding amendment to the lease. Legal advice is recommended in relation to such lease variation agreements. Please contact our Commercial Property team if we can assist with preparing or advising upon lease amendments in accordance with the Regulation.
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