In brief - on Thursday 28 May 2020 the Queensland Parliament passed the highly anticipated Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Regulation)
The Regulation is made pursuant to the COVID-19 Emergency Response Act 2020 (Qld) and the Retail Shop Leases Act 1994 (Qld) (RSLA).
The Regulation is intended to mitigate the effects of the COVID-19 emergency on landlords and tenants by adopting the principles set out in the National Cabinet Mandatory Code of Conduct (Code) and provides for a mechanism to resolve disputes during the pandemic. The Regulation will apply retrospectively from 29 March 2020 and will expire on 31 December 2020.
The provisions under the Regulation only apply to "affected leases". An affected lease is:
1. A lease that is:
a. a retail shop lease; or
b. a lease under which the leased premises are wholly or predominantly used for carrying on a business (prescribed lease); and
2. On the commencement of the Regulation (that is, on 28 May 2020), the lease or an agreement to enter the lease is binding on the tenant, regardless of whether the lease has commenced or not;
3. The tenant is an SME entity; and
4. The tenant, or an entity that is connected with, or an affiliate of, the tenant, which is responsible for employing staff for the business carried on at the leased premises, is eligible for the JobKeeper scheme (i.e. generally, it will have suffered a 30% reduction in revenue and otherwise meets the requirements of the Commonwealth scheme).
An SME entity is, in effect, an entity with an annual turnover of less than $50 million. In working out whether a tenant is an SME entity, the Regulation provides that if the tenant is "connected with" or an "affiliate" of another entity (as those terms are defined in the Income Tax Assessment Act 1997), the tenant's annual turnover is taken to be the aggregate annual turnover of the entities. Otherwise, the annual turnover of the business carried on by the tenant at the leased premises is taken to be the tenant's annual turnover.
In broad terms, an entity is "connected with" another entity if it has at least 40% ownership or voting power in that entity. An entity is an "affiliate" where it acts, or might reasonably be expected to act, in accordance with the directions or in concert with the other entity.
This represents a departure from the approach taken in the equivalent Regulations in other jurisdictions, and from the reference in the Code to the aggregate turnover of a corporate group. It incorporates broader and more nebulous concepts of relationship and control. These concepts may be difficult for parties to a lease, or those adjudicating disputes arising in respect of the Code, to interpret, prove or test.
In addition, it appears that where the tenant's business operates under a simple structure (for example one company which is not connected with, or affiliated with other entities), the annual turnover from trade at the leased premises is only relevant in determining whether the lease is an affected lease. Contrast this to where the tenant's business has a more complex structure, involving "affiliated" or "connected" entities, in which case the tenant's total annual turnover from all such entities, irrespective of where that turnover is generated, appears relevant.
This may produce some strange results. For example, a tenant with total annual turnover significantly in excess of $50 million could be eligible for rent relief where the annual turnover from one premises is less than the $50 million threshold.
The Regulation imposes various obligations on landlords and tenants to reflect the principles of the Code, which will apply for the response period starting on 29 March 2020 and ending on 30 September 2020. These general obligations include:
1. Landlords and tenants must cooperate and act reasonably in good faith;
2. A landlord must not take "prescribed action" on any of the following grounds:
a. a failure to pay rent and/or outgoings during the response period; or
b. the business operating at the premises not being open for business during the hours contemplated by the lease.
3. A landlord must not increase the rent payable by the tenant throughout the response period. The landlord may review the rent as contemplated by the lease but it must not give effect to the increase in rent until after the response period ends. The landlord must also not take any prescribed action after the response period where the tenant fails to pay the amount equivalent to the increase in rent.
The prescribed action that a landlord is prohibited from taking during the response period includes but is not limited to the following:
1. Recovery of possession;
2. Termination of the lease;
3. Eviction of the tenant;
4. Exercising a right of re-entry to premises;
5. Requiring the payment of interest on unpaid rent or outgoings;
6. Making a claim on a bank guarantee or security deposit for unpaid rent and/or outgoings;
7. Requiring the performance of an obligation by the tenant or another person under a guarantee; and
8. Exercising or enforcing any other right under the lease.
Notwithstanding the above, the landlord is not prevented from taking a prescribed action:
1. Where a variation to the lease or settlement agreement made pursuant to the Regulation permits such action;
2. Where the tenant, despite a genuine attempt from the landlord to renegotiate the rent, substantially fails to renegotiate the rent and act in accordance with the Regulation (for example, fails to act reasonably and in good faith or fails to provide sufficient information); or
3. On a ground that is unrelated to the impacts of the COVID-19 pandemic.
Renegotiating rent and other terms
The Regulation does not permit a tenant to withhold payment of rent. However, it provides for a mechanism for the parties to renegotiate the rent payable and other terms of the lease. Either party may make a request in writing for the other to renegotiate.
When renegotiating, the parties must as soon as practicable provide 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 manner. Examples of sufficient information include clearly setting out terms that are sought to be renegotiated, providing accurate financial information and information demonstrating the tenant is an SME entity.
Within 30 days after a party receives sufficient information, the landlord must offer the tenant a reduction in the amount of rent payable under the lease and any additional proposed changes to the lease.
The landlord's offer must:
1. Relate to the rent payable under the lease during the response period;
2. Provide for at least 50% of the rent reduction offered to be in the form of a rent waiver (for example, if the landlord offered a $10,000 reduction in rent then at least $5,000 of that rent must be waived); and
3. Have regard to a range of factors including all the circumstances of the tenant and the affected lease, the reduction in turnover of the business carried on at the leased premises during the response period, the extent to which a failure to reduce the rent would compromise the tenant's ability to comply with its obligations under the lease, the landlord's financial position and any reduction in land tax, rates and statutory charges.
The Regulation does not expressly require the rent reduction to be proportionate to the tenant's reduction in turnover.
Further rent negotiations
The Regulation provides that where the parties agree to a reduction in rent, and the ground on which their agreement was based subsequently changes in a material way, either party may ask the other to negotiate a further reduction in rent during the response period. An example given is that the tenant's income decreases substantially. Interestingly, whilst the section applies for any material change in circumstances relevant to an agreed rent reduction, it does not allow a decrease in the reduction in rent (e.g. in circumstances where the tenant's income is not as badly affected as anticipated). As the provision re-enlivens the rent reduction negotiation process contained in the Regulation where there is a subsequent material change, parties (particularly landlords) seeking certainty in concluding an agreement may need to consider the mechanism by which any rent reduction is agreed.
In relation to an agreement where the landlord has agreed to defer a portion of the rent:
1. The tenant is not required to repay the deferred rent until after the end of the response period;
2. Repayment of the deferred rent must be in instalments over a period of at least 2 years but no more than 3 years; and
3. The landlord must not require the tenant to pay interest on the deferred rent, unless the tenant fails to comply with the conditions on which the rent has been deferred.
In securing payment for the deferred rent, a landlord may continue to hold any security deposit provided under the lease (even after the lease has expired) until such time that the deferred rent has been paid.
The Regulation is silent on circumstances where the security provided under the lease takes the form of a bank guarantee. It is potentially problematic if a bank guarantee held expires before deferred rent has been fully paid, and it is not clear whether such a bank guarantee could, in those circumstances, be called upon and held as cash security.
Extension of lease
Where the rent under an affected lease has been waived or deferred, the landlord must offer the tenant an extension to the term of the lease on the same conditions as the lease. The rent payable for the extension must be adjusted for the waiver or deferral and the extension must be equivalent to the period for which the rent is waived or deferred.
The Regulation permits parties to contract out of the operation of the Regulation by entering into agreements that are inconsistent with the Regulation. Any agreement entered into before the commencement that are inconsistent with the Regulation will not be invalidated.
The Regulation however allows a party to an inconsistent agreement to later renegotiate its terms. On its face, this provision may introduce an element of uncertainty even if an agreement has been entered into either before or after the commencement of the Regulation.
Suspension of prescribed action
If a landlord had commenced a proceeding for a lease dispute or started a prescribed action between 29 March 2020 and the day the Regulation commenced, and at commencement the lease dispute or prescribed action remained unresolved or incomplete, the lease dispute or the prescribed action is taken to be stayed or suspended until the response period ends.
For example, if a landlord has commenced proceedings to terminate the lease and re-enter the premises due to a breach of lease for unpaid rent after 29 March 2020, the landlord will be barred from pursuing the matter further until after the 30 September 2020. It appears however, that this means the landlord will not be barred from pursuing such proceedings in circumstances where the breach related to unpaid rent prior to 29 March 2020.
The Regulation provides for a comprehensive dispute resolution process.
Before commencing mediation, the parties must attempt to resolve the dispute and must cooperate and act reasonably in good faith. If a resolution is not reached, then a party may give notice of the dispute to the Small Business Commissioner.
On receiving a notice of the dispute, the Small Business Commissioner must nominate a mediator and the date for a mediation conference must be at least seven days after the notice is given. At a mediation conference, a party is permitted to be represented by an agent or in the case of a corporation, an officer or employee of the corporation. A party may be represented by a lawyer only with the approval of the mediator and only in certain circumstances.
In the event that the dispute is not resolved during mediation, then an application may be made by either party to QCAT for an order to resolve the dispute.
The Regulation has the baseline foundations to mitigate the impact of the COVID-19 pandemic and ensure the survival of landlords and tenants however, the onus is now on the parties to affected leases to adopt its provisions with a view of reaching a mutually beneficial outcome.