Following the exit of the National Cabinet Mandatory Code of Conduct: Principles of Commercial SME Rental During COVID-19 (Code) On April 7, 2020, the Queensland Government has now made regulations that have an impact on the Code in Queensland.
The Code embodies a set of good faith leasing principles to be applied to certain commercial tenants who are experiencing pressure or financial difficulties due to the COVID-19 pandemic. You can read more about the Code and provisions of emergency forces in other states in our previous warnings which can be found here.
On May 28, 2020, Rental of Retail Stores and Other Commercial Leases (Emergency Response COVID-19) 2020 (Qld) (Regulation) is made based on COVID-19 Emergency Response Act 2020 (Qld) (Law).
The main objectives of this Regulation are:
a) to reduce the impact of a COVID-19 emergency on the lessor and lessee in the lease affected by giving effect to the principles of good faith leasing set out in the Code
b) to determine the settlement process:
me. small business tenancy disputes
ii. rent disputes affected.
In this article, we will discuss:
a) When do the Regulations apply?
b) Who is covered by the Regulation?
c) What are the main provisions of the Regulation?
d) Has the Regulation clarified the uncertainty of the Code?
When do the Regulations apply?
The regulation starts on May 28, 2020 and ends on December 31, 2020.
However, many of the provisions of the Regulation relate to periods known as response periods, namely periods beginning on March 29, 2020 and ending on September 30, 2020 (Response Period).
Who is covered by the Regulation?
For Regulations to apply, a lease must meet the following criteria:
a) the lease must be the retail store rental below Lease Retail Shop Act 1994 (Qld) (RSLA) or lease where the leased place will be wholly or largely used for conducting business;
b) at the commencement of the Rule, lease or agreement to enter into the lease, binding the tenant, whether or not the lease has commenced;
c) the lessee is an SME entity, which is an entity:
A. who runs a business (or non-profit) during the current financial year; and
b. one or both of the following applies:
me. entity’s annual turnover for the current financial year tends to be less than AUD50 million; or
ii. entity’s annual turnover for the previous financial year is less than AUD50 million; and
d) the lessee in a lease, or an entity connected to, or affiliated with, the lessee who is responsible for, or is involved in, hiring staff for business that is run on leased premises, qualifies for the Government’s Commonwealth Government Safeguards scheme.
In this article, the lease is referred to as “Affected Leases” and tenants under Affected Leases are referred to as “Affected Lessees”.
Rents based on the Regulation include leases, sub-leases, licenses or other agreements in which a person grants another person the right to occupy a place, other than as a residence.
The rules do not apply to the following leases:
a) a lease in which the building will be used wholly or in large part for agricultural business under Agricultural Business Debt Mediation Act 2017 (Qld) sch 1; or
b) a lease, permit, license or lease under Land Law 1994 (Qld), unless if:
me. it is a subsite of a place under a contract that has 13 or 16 rental categories under that Act; and
ii. sublessor under sublease is not a government leasing entity.
What are the main provisions of the Regulations relating to Affected Leases?
General obligation to cooperate and act in good faith
The lessor and lessee in the Affected Lease must cooperate and act appropriately and in good faith in all discussions and actions relating to:
a) reduce the impact of COVID-19 emergencies on leasing parties; and
b) other matters for which the Rules apply.
Prohibition of Actions Determined by the Lessor
Lessors based on Affected Leases may not take the Determined Actions on the following grounds:
a) failure to pay rent for the period in whole or in part in the Response Period;
b) failure to pay expenses for the period in whole or in part during the Response Period; and
c) the business is not open for business during the hours required by the lease during the Response Period.
However, there are exceptions to the above, where the lessor can take Specified Actions, including:
a) according to:
me. variations of leases made under the Regulations;
ii. settlement agreements or other agreements between the lessor and lessee that are made regarding failure to pay rent or expenses or not open business; or
I, I, I. court or court order,
b) if, despite sincere efforts by the lessor to negotiate the lease debt and other provisions of the lease under the Regulation, the lessee has substantially failed to fulfill the tenant’s obligations under the regulations relating to negotiations; or
c) on grounds not related to the effects of the COVID-19 emergency.
A Determined Actions including:
a) recovery of ownership
b) termination of rent
c) eviction of the lessee
d) use the right to re-enter the place
e) confiscation of any property, including for the purpose of securing rental payments
h) payment of interest, or related fees or costs, rent or unpaid expenses
i) claims for bank guarantees, compensation or security deposits for rent or unpaid expenses
j) the performance of an obligation by the lessee or another person under collateral based on the rent
k) exercise or enforce other rights by the lessor in a lease agreement or other agreement relating to the rental place.
Lessors may not add rent
The lessor in the Affected Lease may not increase the lease debt by the lessee during the Response Period.
If the lease provides a rental review during the Response Period, the lessor can review the lease based on the lease but may not take effect, and the lease will not begin to increase, the rent increases until after the Response Period.
This provision does not apply to rental turnover payments.
Process for negotiating based on regulations
This regulation provides the following framework for negotiating variations to leases:
A party to the Affected Lease asks the other party, in writing, to lease to negotiate the lease and other terms of the lease.
The parties must immediately provide information regarding the request:
A. true, accurate, true and not misleading; and
b. sufficient to enable the parties to negotiate fairly and transparently (Enough information).
Within 30 days after one of the parties receives Sufficient Information about the request in Step 1, the lessor must offer the lessee a reduction in the amount of rent to be paid in the lease and any changes proposed for the stated conditions.
The offer of the lessor must:
A. relating to one or all of the rent paid based on the Affected Rental during the Response Period;
b. provide no less than 50% reduction in rent offered in the form of waiver of rental fees; and
c. associated with:
me. all circumstances of tenants and Affected Leases, including reductions in business changes made at the place rented during the Response Period;
ii. the extent to which failure to reduce the lease debt under the lease will jeopardize the tenant’s ability to comply with the tenant’s obligations in the lease, including lease payments;
I, I, I. the lessor’s financial position, including any financial assistance provided to the lessor in response to COVID-19; and
iv. if a portion of the rent or other amount paid under the lease represents the amount for land tax, local government rates, mandatory fees, insurance premiums or other expenses – any deduction, or neglect, the amount paid.
After the lessor’s offer is accepted, the lessee and the lessor must cooperate and act appropriately and in good faith in negotiating a reduction in the amount of rent paid based on the rental period for the Response Period, including all conditions related to the reduction in rent.
Following the agreement between the parties, any reduction in rent and all conditions relating to the reduction in rent can be enforced by:
A. variations for rent; or
b. Other agreements between the parties that have an impact on the things agreed upon.
If, after the reduction in the amount of the lease is agreed between the parties in the Affected Lease where the agreement is based on material changes, a party may ask the other party to negotiate to negotiate further reductions in the lease during the Response Period.
Steps 1 to 5 apply to negotiations (unless the lessor is not required to offer a further 50% reduction in rent as a waiver).
Example from Enough information including:
a) clear statement of the terms of the lease the proponent is looking for to negotiate;
b) a statement from the tenant indicating why the lease is an Affected Lease, accompanied by supporting information and evidence, including:
me. accurate financial information or statements about tenant’s business turnover;
ii. information indicating that the lessee is a SME entity, taking into account the entity to which the tenant is connected, or affiliating from;
I, I, I. proof of tenant eligibility for, or participation in, the JobKeeper scheme;
iv. information about whatever steps the tenant has taken to reduce the impact of COVID-19 emergencies on the tenant’s business, including details of any assistance the tenant receives from the Commonwealth, State or local government; and
c) in connection with the franchisor – information about any concessions or benefits provided to or by the franchisor in connection with the lease or expense for the place occupied by the franchisee, and any efforts to provide the concession or benefits to the franchisor.
The parties must realize that the Regulations require that personal information and information relating to business processes or financial information must be kept confidential and must not be disclosed other than under conditions permitted by the Regulations.
Rent Waiver and Rent Deferral
If the parties agree to defer payment of rent during their negotiations, variations of the lease or agreement between the parties must:
a) does not require deferred lease payments to begin until the day after the end of the Response Period;
b) require deferred lease payments to be amortized, using the method agreed between the parties, for a minimum period of 2 years but not more than 3 years; and
c) provided that the lessor may not, under a lease, require the lessee to pay interest or any other fees or costs relating to the amount of the lease deferred, unless the lessee fails to comply with the conditions under which the lease is deferred.
In addition, the lessor can continue to hold the security deposit given to the lessor until the deferred lease has been paid. If the lessor continues to hold the security deposit for the period after the lease has ended, the lessor can use the security deposit in the same conditions as specified in the lease, even though the lease may have ended.
Extension of rental period
If the parties agree to write off the lease or postpone the lease for a period, the lessor must offer the lessee an extension for the lease period for the same period in which the lease was released or suspended. The extension must be in the same condition, except that the rental fee during the extension must be adjusted for waiver or suspension.
The lessor is not required to offer an extension if the lessor:
a) subject to existing legal obligations that are inconsistent with the obligation to extend the lease; or
b) shows that the lease cannot be extended because the lessor intends to use the rented place for commercial purposes of the lessor.
Reduction of service
If the lessee under Affected Rent cannot operate the business on site for any part of the Response Period due to a COVID-19 emergency, the lessor can stop or reduce any service at the location:
a) to the extent that it is natural in the circumstances; and
b) subject to the fair request of the lessee.
Negotiate a different agreement
Nothing in the Rules:
a) prevent the parties to the Affected Lease from entering into an agreement that is not consistent with; or
b) affect the validity of the agreement that is not consistent with,
restrictions on taking the Defined Actions or the process to negotiate the reduction of the lease discussed above, regardless of whether the agreement was made before or after the Rules began. While this means the lessor and lessee have the freedom to negotiate outside the scope of the suggested Regulation, the lessee retains the right to request renegotiation of leases under the Regulation, despite the terms of the agreement that seek to limit these rights.
General waivers for tenants comply with COVID-19 response measures
If the tenant in a retail store lease, specified lease or other small business lease, does or omits to do something that is required in the lease:
a) on or after April 23, 2020; and
b) as required in COVID-19 response measures or Commonwealth or other laws in response to COVID-19 emergencies,
action or omission:
a) is deemed not to mean breach of rent; and
b) is not a reason for the termination of the lease or the taking of the Actions determined by the lessor for the lessee.
However, this provision does not affect termination of rent or Specified Actions completed or completed before May 28, 2020.
Action was taken between March 29, 2020 and May 28, 2020
a) during the period from March 29, 2020 to May 28, 2020:
me. dispute proceedings involving Prescribed Actions commence in connection with Affected Leases; or
ii. the lessor in the lease has initiated or taken an action which, if it has been started or taken after the commencement, would constitute a Prescribed Action that is contrary to the Regulations; and
b) at the commencement of the Regulations:
me. disputes have not been resolved; or
ii. the action hasn’t been completed or completed,
actions or actions taken to remain or be deferred until the Response Period ends.
What happens if the parties disagree?
The regulation requires the parties to the lease agreement to try to resolve any disputes before any mediation. In an effort to resolve disputes, each party must cooperate and act appropriately and in good faith.
If the parties fail to resolve the dispute, the small business commissioner (Commissioner) can receive dispute notifications. Dispute notification may be dismissed if the Commissioner considers that the dispute notification:
a) does not relate to eligible rental disputes;
b) reckless or annoying; or
c) has not been given in good faith.
Commissioners must arrange mediation conferences.
If the parties cannot resolve the dispute within 30 days of giving the dispute notification there is room to refer the matter to QCAT for inspection.
Has the Regulation clarified the uncertainty of this Code?
As mentioned in our previous warning, which can be found hereThis Code contains several uncertainties related to the implementation and implementation. We have reviewed some of the uncertainties below regarding the introduction of the Regulations:
What if Lessee is not Lessee Affected?
If leases are not Affected Leases, lessors and lessees can still use the Code principles as a framework for negotiating rental assistance arrangements, but this is not mandatory in Queensland.
Do the Regulations apply to new leases that were included during the COVID-19 pandemic?
The regulations apply to Affected Leases. As noted above, a lease is an Affected Lease if, among other things, at the commencement of the Regulation (becoming May 28, 2020), a lease, or an agreement to enter into a lease, binds the tenant as to whether or not the lease has begun. As such, new leases entered after May 28, 2020 are not subject to regulation.
What evidence does Lessee have to support financial pressures or difficulties and how do they show this as a direct result of the COVID-19 pandemic?
The regulation provides further guidance on what level of information is needed to show the economic impact of the COVID-19 pandemic on Affected Lessees. However, examples of Adequate Information that must be provided by the parties are guidance notes only and are not prescriptive.
How is turnover determined?
Under the Regulations, business changes are defined to include income derived from internet sales but do not include grants or assistance provided by the Commonwealth, State or local governments to reduce the impact of the COVID-19 emergency. Regulations do not instead provide specific examples of what might or might not be considered in determining the turnover of lessees.
However, the meaning of an SME entity (which is relevant in the context of determining whether a lease is an Affected Lease) can provide some guidance. Part 5 of Loan Collateral for Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cwlth) states that an entity’s annual turnover for the financial year is the total of the following obtained in the year of business travel:
a) proceeds from sales of goods and / or services
b) commission income
c) repair and service income
d) rent, rent and income
e) gifts and government subsidies
f) interest, royalties and dividends
g) other operating income.
How does the turnover test apply to Lessees that are part of a company group or franchise structure?
The regulation stipulates that for the purpose of knowing whether the tenant is a SME entity (which again is relevant in the context of determining whether a lease is an Affected Lease), the tenant’s annual turnover is:
a) if the lessee is an entity connected to, or affiliated with, another entity – the aggregate annual turnover of the entity; or
b) vice versa – annual turnover of businesses run by on-site tenants.
The regulation also notes that an entity that is a franchisee is not connected to, or affiliated with, the franchisor just because the entity is a franchisee.
Is Lessees entitled to a reduction in rent because of COVID-19? For how long?
The regulation clarifies that rental assistance is available for Affected Lesse during the Response Period, which covers the period from 29 March 2020 to 30 September 2020.
What about the Lessor who is facing financial difficulties because of COVID-19?
The regulation notes that the lessor’s rent offer must take into account the lessor’s financial ability to offer lease relief, including any financial assistance provided to the lessor in response to COVID-19.
What about the shopping center? Does the Lessor need to offer the same deal to all Lessees in the same shopping center or building?
No, the Regulations only stipulate that the parties must “negotiate in good faith with a view to approving rental assistance for implementation” during the Response Period.
Rental assistance offered by lessors must be “based on all Affected Leases” conditions.
The economic impact of the COVID-19 pandemic will be different for all shopping center tenants. The code requires the lessor to agree to “provisional, adjusted and appropriate arrangements” for each tenant on a case-by-case basis.
If only a few Lesse are allowed to trade in a shopping center or building, can Lessor close the building or shopping center to reduce costs without incurring compensation claims from Lesse remaining?
Regulations have not yet clarified this issue. Unless the Government issues directives that require closure, the likely answer is that the lessor is potentially liable to claims in the event of closure. However, the Regulation regulates that the terms of service be reduced to location if the tenant cannot operate the business on location (see our comments above). RSLA also stipulates that the lessor is not responsible for paying compensation under article 43 (1) of the Act for losses or damage suffered because the lessor took action in a reasonable response to an emergency.
Is there a right for Lessees to terminate the lease agreement because of COVID-19?
With no lease termination rights, no.
However, this Regulation does not prevent the parties from agreeing to take any action in relation to the Affected Lease, including those who agree to terminate the Affected Lease.
Can Lessor call security during COVID-19?
The regulation prohibits lessors in Affected Leases from calling for security provided by Affected Tenants or others who secure the performance of obligations of Affected Tenants under Affected Leases during the Response Period due to failure of the Affected Tenant to, during the Response Period :
a) pay rent;
b) pay out fees; or
c) operates and is open for business during the hours specified in the Affected Lease.
This includes bonds, security deposits, compensation or guarantees.
However, the Regulation does not prevent the lessor from calling for security where the settlement agreement has been reached based on the Regulation and the Affected Lessee does not comply with the agreement. Furthermore, this Regulation does not prohibit lessors from asking for any security for other reasons, if permitted under Affected Leases.
The rules do not include clear provisions directing the guarantor to be bound by (if not participating in negotiations) an agreement between the lessee and the lessee.
Can the Lessor terminate the contract during COVID-19?
If the lessee is an Affected Tenant, the lessee cannot terminate the lease if the reason for termination is the failure of the Affected Tenant to, as long as
a) pay rent;
b) pay out fees; or
c) operates and is open for business during the hours specified in the Affected Lease.
The regulation does not prevent termination of the reasons for the arrears in rent related to the period before the Response Period. There is no prohibition on terminating a lease based on other violations (other than failure to pay rent or expenses, or failure to trade in the Response Period). Any termination by the lessor will incur the right of the lessee to submit a request for assistance with the foreclosure, becoming an easy remedy given where the lessee is able to demonstrate that the relevant violation will be corrected.
* This information is accurate at 17:00 on Tuesday 2 June 2020 and is subject to change as this situation develops.
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