Commercial Leases, what are my obligations under the new regulation?

Queensland has now passed the Retail Shop Leases and Other Commercial Leases (Covid-19 Emergency Response) Regulation implementing the principles of the National Code of Conduct relating to commercial leases during the pandemic. Below we discuss the key obligations of both Landlords and Tenants.

Landlords obligations to provide rent relief

If a Tenant under an eligible lease makes a written request to negotiate the payment of rent a Landlord must within 30 days of receiving ‘sufficient information’ must offer the Tenant a reduction in rent. Such offer must:

• Relate to any or all rent payable under the affected lease between 29 March 2020 and 30 September 2020 [Response Period];
• Provide for at least 50% of the rent reduction offered to be in the form of a rent waiver;
• Have regard to:
  • All circumstances of the lease including the reduction in turnover of the Tenant’s business;
  • The extent to which any failure to reduce the rent will compromise the Tenant’s ability to otherwise comply with the terms of their lease;
  • The Landlord’s financial position including any financial relief received as part of a COVID-19 response measure; and
  • Whether any portion of rent or other amount payable under the lease represents an amount for land tax, rates or other government charges is to be reduced or waived.

Landlords must act in good faith and cooperate reasonably in negotiating any rent relief including any conditions relating to any rent relief.

Requirements relating to deferred rent

Any agreement relating to deferred rent must not require payment to commence until the day after the Response Period and must require payment to be made using a method agreed between the parties over a period of at least 2 years but no more than 3 years.

Landlords are entitled to retain any security amount until the deferred rent is paid despite any other term of the lease to the contrary.

Landlords obligations to extend Lease

If a rent reduction or waiver is agreed a Landlord must offer to extend the term of the lease for a period equivalent to the period of rent reduction or waiver unless the Landlord has already agreed to lease the premises to someone else at the end of the lease term or requires the premises for its own commercial purpose.

Tenants obligations to provide sufficient information

Tenants must provide Landlords with sufficient information to allow Landlords to properly consider any request for rent relief. Some examples of sufficient information provided in the Regulation are:

• A clear statement about the terms of the lease the Tenant is seeking to negotiate;
• A statement by the Tenant that demonstrates the eligibility criteria for the Code to apply including:
  • Accurate financial information or statements about turnover of the Tenants business (including any aggregate turnover of any connected or affiliated entities);
  • Information demonstrating that the Tenant is an SME entity (i.e. has a turnover of less than $50 million);
  • Evidence of the Tenant’s eligibility for and participation in the jopkeeper scheme;
  • Information about any steps the Tenant has taken to mitigate the effects COVID-19 has had on the Tenants business including details or any assistance being received by the Commonwealth, State or local government;

Tenants must provide true, accurate and correct information that is not misleading and Tenants must not refuse to supply sufficient information. If a Tenant fails to supply sufficient information and the Landlord has made genuine attempts to negotiate pursuant to the Code then the Landlord is not prevented from taking any enforcement action under the lease.

It is important to note that Landlords should not ask for information that is onerous especially where that involves paying a fee to produce any document or require any information to be verified, audited or provided by a third party such as an accountant.

Restrictions on other matters

Aside from requiring Landlords and Tenants to negotiate in good faith Landlords are also restricted from taking any prescribed action or commence any proceeding where a Tenant fails to pay rent or outgoings or open for trade during the Response Period. Examples of prescribed actions are:

• Terminating the lease;
• Exercising any right of re-entry;
• Recovering possession of any part of the premises;
• Claim any interest, fees or other charges for late payments;
• Make any claim on any bank guarantee or security bond;
• Evict the Tenant; or
• Exercise or enforce any other right under the lease.

Landlords are not prevented from taking any prescribed action where the breach does not relate to the COVID-19 emergency for example where the Tenant causes wilful damage to the premises.

What if a Landlord had taken steps to enforce the lease before 28 March 2020?

If a Landlord has commenced any action in relation to a lease, for example by issuing a notice to remedy breach, prior to 28 March 2020 or started to take any other action that is now considered a prescribed action and such matter was not resolved prior to 28 March 2020 that action is deemed to be stayed until 30 September 2020 and cannot be pursued any further by the Landlord until that time.

Other key matters:

• There is no need to formally vary the lease, a simple written agreement between the parties detailing any rent reduction or waiver and any other conditions is sufficient.
• The Code is retrospective and applies to 29 March 2020.
• If the lease is a Retail Shop Lease there is no requirement for Landlords to give revised Lessor Disclosure Statements in respect of any temporary rent relief.
• Landlords are required to comply with the Code however there is nothing preventing parties from coming to an alternate arrangement provided both Landlord and Tenant mutually agree.
• If a franchisee’s sublease with its franchisor, or the franchisors leasing entity, then the Code will apply to that lease irrespective of the franchisors turnover or eligibility for jopkeeper.
• Where there is a further change in circumstances throughout the Response Period Tenants can seek to further negotiate the terms of the lease provided they comply with the Code and make written submissions and provide sufficient information.
• Landlords are prevented from increasing rent during the Response Period or from seeking to backdate any rent increase at a later date.

Queensland Small Business Commissioner

Queensland has recently appointed a Small Business Commissioner whose role is to not only assist with the dispute resolution process but also to provide information and advisory services to small businesses.

Further details on the Commissioners role, the dispute resolution process and how to lodge a dispute can be found here.

Ultimately the Regulations intent mirrors that of the Code in that Landlords and Tenants are required to work together and the financial circumstances of both Landlords and Tenants must be considered. Whilst a dispute resolution process exists parties should avoid unnecessarily lodging a dispute or acting in a deliberately obstructive manner to prevent negotiations in good faith.

If you are looking for business advice, do not forget that you can always contact us to chat about our business services and how we may be able to help you.