On 22 April 2020 the Queensland Government passed the first step for implementation of the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (“the Code”) in the COVID-19 Emergency Response Act 2020 (“the Act”).

On 28 May 2020 the Queensland Government took the next step with the publication of the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (“the Regulation”).

Click HERE to read the full regulation.

Purpose of the Regulation

The purpose of the Regulation as set out in section 3 is to:

1. Mitigate the effects of the COVID-19 emergency on lessors and lessees under Affected Leases by giving effect to the good faith leasing principles set out in the Code; and
2. Establish a process for resolving:
   • Small business tenancy disputes; and
   • Affected lease disputes.

What is an Affected Lease?

The definition of an Affected Lease in section 5 is intended to maintain the same eligibility criteria under the Code as being either a retail shop lease or a lease of premises used to carry on a business (“a Prescribed Lease”) where the Lessee is an SME entity and eligible for the JobKeeper Scheme. 

Lessors under an Affected Lease are prohibited from taking a Prescribed Action for a Lessee’s failure to pay rent or outgoings or a failure to carry on their business during business hours as required under the lease during the Response Period. 

What is a Prescribed Action?

A Prescribed Action is defined in section 9 to include the usual enforcement options for a Lessor to start proceedings in a Court or Tribunal seeking termination, eviction, forfeiture or a claim for damages.

It also extends to a prohibition on starting a proceeding to enforce the performance of a third party guarantee under a lease. There is also a blanket prohibition on the Lessor ”exercising or enforcing another right by the lessor under the lease” and given the potential broad application of this may have different consequences for lessors depending on the particular terms of the lease.

The Response Period starts on 29 March 2020 and ends on 30 September 2020. 

Under section 12(2)(c) of the Regulation, a Lessor can only take a Prescribed Action if, despite a genuine attempt by the Lessor to negotiate rent payable and other conditions of the lease under Division 3 of the Regulation, the Lessee has substantially failed to comply with the Lessee’s obligation under that division in relation to the negotiations. 

A Prescribed Action can also be taken in accordance with a variation of the lease made under Division 3, for example, where the Lessee fails to pay an agreed amount of reduced rent, or on a ground that is not related to the effects of the COVID-19 emergency, such as a prior failure to pay rent or outgoings or perform another obligations such as repair, maintenance or refurbishment.

Obligations to negotiate

Division 3 of Part 2 provides for the obligations to negotiate between the parties. 

Section 14 provides that one party can ask the other to negotiate the rent payable and other conditions of the lease. After this request is made, the parties must give each other information relating to the request which is:

1. True, accurate, correct and not misleading; and,
2. Sufficient to enable the parties to negotiate in a fair and transparent way.

The section provides examples of sufficient information which includes accurate financial information or statements about turnover of the Lessee’s business, evidence that the Lessee is a SME entity and eligible for JobKeeper and information about any mitigating steps taken by the Lessee in response to the COVID-19 Emergency.

It should be noted that the Lessee may be permitted to request financial and other information under this section from the Lessor regarding the Lessor’s financial position and any financial relief to which it is entitled as these are factors to take into account in the offer on rent payable and other conditions to be made by the Lessor as discussed below. 

Section 15 sets out the following requirements for the parties in negotiating the rent payable and other conditions:

1. 30 days after receipt of information in section 14 from the lessee, the lessor must offer a reduction in rent payable under the lease and any other proposed changes.
2. The offer must:
   • Relate to any or all of the rent payable under the Affected Lease during the Response Period; and
   • 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 lessee and the Affected Lease, including the reduction in turnover of the business carried on at the leased premises during the response period; and
     • The extent to which a failure to reduce the rent payable under the lease would compromise the lessee’s ability to comply with the lessee’s obligations under the lease, including the payment of rent; and
     • The lessor’s financial position, including any financial relief provided to the Lessor as a COVID-19 response measure; and
     • If a portion of rent or another amount payable under the lease represents an amount for land tax, local government rates, statutory charges, insurance premiums or other outgoings, any reduction in or waiver of, the amount payable.
3. On receiving the offer, the parties must cooperate and act reasonably and in good faith in negotiating a rent reduction and any other conditions.
4. The rent reduction and any other conditions may be given effect by either a variation to the lease or another agreement between the parties which gives effect the terms agreed.

Further negotiations

It is possible for either party to request a further reduction (not an increase) in rent during the Response Period if the grounds on which the agreement is based changes in a material way. In any further agreement the Lessor is not required to provide a 50% waiver. 

Deferred Rent

Section 17 provides that any Deferred Rent must not be required to be paid until at least the day after the end of the Response Period.

The payment of the Deferred Rent must be amortised over a period of not less than two years and not more than three years. The upper range of that period is different to the provisions of the Code which provided for the end of the term of the Lease.

The Lessor is prohibited from charging any interest, fee or other charge on the Deferred Rent unless the Lessee fails to comply with any conditions on the Deferred Rent. 

The period of repayments may extend beyond the expiry of the lease because of the minimum two years and maximum three-year limits. In this case, section 17(3) provides that the Lessor may continue to hold any security deposit until the repayments have ended. 

Extension of Term

If Rent has been waived or deferred under an Affected Lease, the Lessor must offer an extension of the term of the lease (on the same conditions in the lease subject to the agreed rent reduction and other conditions) for the period equivalent to the period for which the rent was waived or deferred.

This may require a variation or amendment to the Lease to give effect to the extension and consideration should be given for the need to register an amendment of lease with the Titles Office and how any change to the term will affect any future options in the Lease. 

Lessor reduction of services

Lessors are permitted to reduce services to Lessees and the Leased Premises where the Lessee has been unable to operate the business. 

Confidentiality

Both parties are obligated to hold confidential all information disclosed to it during the negotiations on the rent and other condition of the Lease pursuant to section 20.

Confidential information would be personal information or information relating the finances or operation of the business but not including information already in the public domain. There are limited permitted disclosures such as with the consent of the other party or to certain advisors. 

Dispute Resolution

Part 3 of the Regulation provides the dispute resolution process for Eligible Lease Disputes which are both Affected Lease Disputes and Small Business Tenancy Disputes.

In this way, Part 3 expands the reach of the dispute resolution process beyond business affected by COVID-19 to any lease of a premises used wholly or predominantly for carrying on a small business having a sole trader or fewer than 20 full-time or full-time equivalent employees. 

Parties are required to attempt to resolve their dispute themselves in the first instance by negotiating in good faith. Failing this a party can give a Dispute Notice in the approved form to the Small Business Commissioner (“the Commissioner”) who will either accept or dismiss the Dispute Notice. 

The Commissioner may dismiss the Dispute Notice if it does not relate to an eligible lease dispute, is frivolous or vexation or has not been given in good faith. The parties will then have to consider alternative forms of dispute resolution or seeking the intervention of the Courts (noting the prohibition on Prescribed Actions discussed above). There is no prohibition on giving another Dispute Notice to the Commissioner. 

If the Commissioner accepts the Dispute Notice then the Commissioner must take steps to nominate a mediator and give notice to the parties about the mediation. There is then a process for the mediation to take place set out in the Regulation.

It should be noted that there is no requirement on the parties to undertake the dispute resolution process in Part 3 before a Lessor can take a Prescribed Action as discussed above. The parties can also agree to undertake any other form of dispute resolution they like to attempt to resolve their issues.

If you would like any advice on these regulations, call me on 07-32286133 or send me an email at davida@hillhouse.com.au.