On 28 May 2020 the Queensland Government passed the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020.
The Regulation has retrospective effect from 29 March 2020 and ends on 30 September 2020.
The implementation of this Regulation is Queensland’s way of making the Mandatory Code of Conduct for SME Commercial Leasing Principles during the COVID-19 crisis (“National Code”) law.
The purpose of the Regulation is twofold:
- To mitigate the effects of the COVID-19 emergency on landlords and tenants by giving effect to the good faith leasing principles set out in the National Code; and
- To establish a process for resolving small business tenancy disputes and affected lease disputes.
What is an affected lease?
The Regulation provides that a lease of a premises is an affected lease if it is:
- A retail shop lease; or
- A prescribed lease (which is a lease other than a retail shop lease, under which a leased premises are used for carrying on a business) such as a commercial lease.
In addition to the nature of the lease, there are also some additional qualifications ought to be met. Those are:
- On the commencement of the lease, or an agreement to enter into the lease, is binding on the lessee, whether or not the lease has commenced;
- The lessee under the lease is an SME entity (tenants with a total turnover of less than $50m);
- The lessee, or an entity connected with, or an affiliate of the lessee, is responsible for employing staff for the business, is eligible for the jobkeeper scheme.
Most farming business leases, pastoral leases and agricultural leases are excluded from the operation of the Regulation.
The question most have is how the Regulation changes what you can and can’t do under your lease.
Can I take legal action if my tenant fails to pay rent or outgoings or doesn’t open for business between now and 30 September 2020?
If the leases premises fits the definition of an affected lease then the answer is No. Landlords and tenants must cooperate to mitigate the effect of the COVID-19 emergency.
However, parties to an affected lease may enter into an agreement (such as a Deed of Variation of Lease) which is inconsistent to the Regulation, in which case the provisions in that agreement will apply. So for example, an agreement is entered into which provides for a reduction in rent and the tenant fails to pay the reduced rent, then the landlord is permitted to take legal action to recover the unpaid rent.
My lease provides for a fixed percentage rent review on 1 July, 2020. Can I apply this?
If the lease premises fits the definition of an affected lease then the answer is yes, but not just yet. The Regulation has frozen rental increases until 30 September 2020.
If the lease provides for a review of rent during the response period, the landlord may review the rent under the lease but must not give effect to an increase in rent until the response period ends. The Regulation gives the following example: The landlord is entitled, on review of rent under the lease, to increase rent on 1 July 2020. The landlord decides to increase the amount of rent payable. The lessee is not required to pay the increased amount, and rent in relation to the increased amount can not start to accrue, until after the end of the response period.
I’m a tenant and have been effected by COVID-19. How do I initiate negotiations?
Either party of an affected lease can initiate negotiations. If you are a tenant, you should put a request for a rent reduction to the landlord in writing.
The parties must, as soon as practicable, give each other information relating to the request that is:
- Trust, accurate, correct and not misleading; and
- Sufficient to enable the parties to negotiate in a fair and transparent way.
The Regulation gives the following examples of sufficient information:
- a clear statement about the terms of the lease the initiator is seeking to negotiate
- a statement by the lessee that demonstrates why the lease is an affected lease, accompanied by supporting information and evidence, including—
- accurate financial information or statements about the turnover of the lessee’s business
- information demonstrating that the lessee is an SME entity under section 5, having regard to any entities that the lessee is connected with, or an affiliate of
- evidence of the lessee’s eligibility for, or participation in, the jobkeeper scheme
- information about any steps the lessee has taken to mitigate the effects of the COVID-19 emergency on the lessee’s business, including the details of any assistance being received by the lessee from the Commonwealth, State or a local government
- in relation to a franchisor—information about any concession or benefit provided to or by the franchisor in relation to rent or outgoings for the premises occupied by the franchisee, and any undertakings to pass those concessions or benefits on to the franchisee
Within 30 days after a party receives the sufficient information, the landlord must offer the lessee a reduction in the amount of rent payable under the lease and any proposed changes to other stated conditions. The offer must:
- relate to any or all of the rent payable under the affected lease to 30 September, 2020;
- provide for no less than 50% of the rent reduction offered to be in the form of a waiver of rent;
- have regard to:
- all the circumstances of the lessee, including the reduction in turnover;
- the extent to which a failure to reduce the rent would compromise the lessee’s ability to pay rent;
- the landlord’s financial position, including any financial relief provided to the landlord
- any reduction in relation to outgoings.
Once the parties reach agreement in relation to the rent reduction, the parties should enter into an agreement which varies the lease to record that agreement.
What about deferred rent?
Rent can be deferred during COVID-19, however:
- repayment cannot be required until 1 October, 2020;
- repayment must be over an agreed period of between 2-3 years;
- no interest, fee or charge can be imposed on the deferred rent (unless the tenant fails to pay the deferred rent when required);
To secure payment of the deferred rent, a landlord can continue to hold on to security under the lease until the deferred rent is repaid.
What if we can’t reach an agreement?
Either party can refer the matter to the Small Business Commissioner to mediate the matter. This is permitted regardless of any dispute resolution process stated in the lease.
If the mediation is unsuccessful, then the parties will need to apply to QCAT or a court of competent jurisdiction.
How can we help?
If you are unsure of how this Regulation affects you or you require assistance documenting an agreement reached with your landlord or tenant during COVID-19, please contact us.