Month: May 2020

By way of update, South Australia has repealed the sections relating to commercial leases in the COVID Act and Regulations that we advised on earlier and have replaced them.

Please see the new COVID Emergency Response Act 2020 (the Act) and COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (the Regulations).

The Act and Regulations have retrospective application and apply from 30 March 2020 and end on 30 September 2020.

The Act now provides for the Governor to make regulations regarding commercial leases and all the operative provisions regarding commercial leases are in the Regulations.

The main difference seems to be a limitation on which leases the regulations apply to and the imposition of a turnover threshold in relation to who is an ‘affected tenant’, which wasn’t included previously. There are also some additional dispute resolution clauses.

For ease of reference, we have set out below the updated position in South Australia.

Application

The Regulations do not apply to a lease entered into after the commencement of the prescribed period (ie after 30 March 2020), unless that lease was entered into as a result of an option or an extension / renewal on similar terms.

The provisions of every commercial lease is taken to be modified to the extent necessary to give effect to the operation of the Act.

Obligation to negotiate in good faith

The parties to a commercial lease must make a genuine attempt to negotiate in good faith the rent payable and any other terms of the lease. This seems to apply to all leases (whether or not the tenant is an affected tenant – see below).

Affected tenant

An ‘affected tenant’ is defined to be a tenant that is suffering financial hardship as a result of COVID-19 (ie is eligible for JobKeeper) and has a turnover of less and $50 million (there are some additional provisions regarding how to calculate turnover).

Prescribed action

If a tenant is an affected tenant, the landlord cannot take any ‘prescribed action’ against the tenant if the breach consists of:

• a failure to pay rent
• a failure to pay outgoings
• the business not being open for business during the hours specified in the lease

If the tenant is required to do something under the laws of the State as a result of COVID-19 (eg is required to close as a result of a public health order), then this is not a breach of the lease and the landlord cannot do any of the following:

• terminate, evict, re-enter etc
• claim damages
• charge interest on unpaid rent
• use the security bond
• enforce a personal guarantee
• any other remedy otherwise available to a landlord against a tenant at common law or under the law of this State

Continuing prescribed action

If the landlord had started any of the above actions during the period 30 March 2020 and 9 April 2020 but they had not been finalised, then that action is suspended until the Act no longer applies.

Interestingly, this seems to apply even if the tenant is not an affected lessee, so long as the ‘lessee is suffering financial hardship as a result of the COVID-19 pandemic’ (ie eligible for JobKeeper).

Rent freeze

If a tenant is an affected tenant, the rent must not be increased during the prescribed period (excluding turnover rent) unless agreed between the parties.

Land tax

If a tenant is an affected tenant, a tenant is not required to pay land tax or reimburse the landlord for the payment of land tax (where the lease requires a tenant to pay) during the prescribed period.

Dispute resolution

The parties can apply for mediation and the Court (if mediation is unsuccessful) in relation to any disputes that have arisen as a result of COVID-19. However a tenant cannot apply for mediation unless it is an affected tenant.

 

 

 

The Leases (Commercial and Retail) COVID-19 Emergency Response Declaration 2020 came into effect on 11 May 2020 by way of declaration under the COVID-19 Emergency Response Act 2020 where the latter had provided the Minister powers to make declarations in relation to a number of matters in respect of  the Leases (Commercial and Retail) Act 2001. The ACT Government has also issued a Guide, which landlords and tenants might find helpful, but it doesn’t have the force of law.

The ACT legislation is slightly different to some of the other States in that neither party has a right to “trigger” a good faith negotiation – but it achieves this in practical terms by preventing a landlord taking action against a tenant unless such negotiations have actually occurred.

Application to certain leases

The declaration applies:

• to a lease entered into before 7 April 2020;
• to impacted tenants, being a tenant who:
  • qualifies for the JobKeeper scheme; and
  • has less than $50 million annual turnover for FY18/19; and
• a lease set out in sections 12(1)-(2)(a)-(b) of the Leases (Commercial and Retail) Act 2001 which relevantly includes:
  • retail premises (except those exceeding 1000 sqm leased to a listed public company or a subsidiary of a listed public company); and
  • small commercial premises (ie less than 300 sqm),

The ACT rent relief legislation excludes premises like warehouse premises and office premises (unless they are for areas less than 300 sqm).

Restrictions

Unless “good faith negotiations” (ie. having regard to the overarching principles of the National Code of Conduct) have taken place, the landlord is restricted from taking certain actions, including:

• evicting or re-entering;
• claiming damages;
• charging penalty interest; and
• claiming on any lease security (for example, a bond, bank guarantee or director’s guarantees)

in relation to a failure by the tenant during the “prescribed period”:

• to pay rent, outgoings or other payments; or
• trade during the required trading hours.

Currently, the prescribed period means from 1 April 2020 to 7 July 2020 (noting that the government guide indicates that this will probably be extended to 30 September 2020).

The legislation is retrospective and applies to termination notices given to tenants on or after 1 April 2020, where these may be able to be contested by the tenant, and a Magistrates Court must not confirm certain terminations unless it is satisfied good faith negotiations have taken place.

However, the restrictions do not apply where:

• the tenant has agree to the termination notice or action; or
• good faith negotiations have taken place and the tenant surrenders the lease.

 

The COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“VIC Regulations”) became law on Friday 1 May 2020. The VIC Regulations brings the National Cabinet’s “Mandatory Code of Conduct” (Code) into law in Victoria.

• The VIC Regulations operate retrospectively from 29 March 2020 to 29 September 2020 (the “relevant period”)
• The VIC Regulations target an “eligible lease”, that is:
• • a lease/licence that is:
    • in effect on 29 March 2020 (including options to renew in such leases); and
    • being either a ‘retail lease’ (ie lease under the Victorian retail legislation) or a ‘non-retail commercial lease or licence’, but excludes most farming and similar activities. The ambit of the definition of ‘Non-retail commercial lease or licence’ is very broad – applying to most leases/licences including written/unwritten and express/implied agreements and sub-leases and sub-licences, provided the right to occupy the premises is for the sole or predominant purpose of carrying on business at the premises; and
  • where the tenant/licensee, on or after 29 March 2020:
    • has an annual turnover of less than $50M for the current or previous year (including the aggregate turnover of an entity connected with/affiliated with the tenant – within the meaning of sections 328-125 and 328-130 in the Income Tax Assessment Act 1997 (Cth)); and
    • is an employer who qualifies for and also participates in the JobKeeper scheme (eg. a business where turnover drops by 30%).

For simplicity, in this summary we have use the terms “tenant”, “rent” and “lease”, despite the fact that the VIC Regulations apply to both leases/licences and tenants/licensees.

• The VIC Regulations state that a failure to pay rent during the relevant period is not a breach of the lease, if the tenant either:
  • requests rent relief in accordance with process set out the VIC Regulations, including providing the required statements/information and participating properly in the negotiation process (Rent Negotiation) regardless of whether or not parties reach agreement; or
  • pays the rent agreed or determined as a result of a Rent Negotiation.

(“Tenant Requirements”) and a landlord must not evict a tenant, re-enter the premises, claim on any lease security or charge interest if the tenant satisfies the Tenant Requirements.

• The Rent Negotiation process can be largely summarised as follows:
  • it can only be initiated by the tenant (by written request to the landlord, including a required statement about the application of the VIC Regulations and attaching information evidencing the tenant’s turnover and eligibility for, and participation, in the JobKeeper scheme);
  • the landlord must make an offer for rent relief within 14 days after receiving the tenant’s request (a longer period can be agreed). The criteria for the offer are summarised below; and
  • the agreed rent relief must be properly documented, including by way of a variation of lease.
• The landlord’s rent relief offer must be based on the circumstances of the lease and:
  • will apply to the whole of the ‘relevant period’ (ie 29 March 2020 to 29 September 2020)
  • may be up to 100% of the rent payable during the relevant period
  • must provide no less than 50% of the rent relief offered in the form of a waiver (unless agreed otherwise by the parties)
  • take into account:
    • tenant’s reduction in turnover;
    • a waiver of outgoings/other recurring expenses for the part of the relevant period that the tenant is not able to operate the business;
    • whether failure to offer sufficient rent relief would compromise the tenant’s ability to continue to perform the lease (ie rent obligations beyond the relevant period);
    • the landlord’s financial ability to offer rent relief (including if the landlord’s financiers have offered relief); and
    • a reduction in the outgoings charged, imposed or levied to the landlord (and concessions given by statutory authorities to a landlord must generally be “passed on”).
• Unless otherwise agreed by the parties, the tenant does not have to start paying back any deferred component of the rent until the earlier of 30 September 2020 and the lease expiry and the tenant is allowed a total repayment period of at least 24 months (or the balance of the lease term if that it longer than 24 months). The landlord must also offer to extend the lease for such deferral period (which may mean that landlords will need to carefully consider whether a deferral is an appropriate offer in their circumstances).
• A tenant may make subsequent requests to the landlord for further rent relief (even after a rent relief agreement/variation is entered into), if the tenant’s financial circumstances materially change (but on a second or subsequent request, the requirement to allow at least a 50% waiver of rent, does not apply). It is therefore in tenant’s best interests to try to enter into an arrangement that takes into account any possible further deterioration at the beginning of the process, rather than relying on the right to have “a second go”.
• The rent for an eligible lease can’t be increased during the relevant period, unless otherwise agreed in writing (eg. agreed during the Rent Negotiation process). That is, any rent increase which would have normally occurred in that period is delayed until 30 September 2020 and the landlord cannot “claw back” that unpaid increase amount for that protected period. This doesn’t apply for turnover rent in a retail lease.
• If the landlord contravenes the VIC Regulations, the landlord may be subject to fines (~$3,300 per contravention) in addition to the tenant’s rights at law (eg. injunction, damages).
• There are general obligations for all landlords/tenants of an eligible lease to:
  • cooperate and act reasonably and in good faith in all discussions/actions under the VIC Regulations
  • keep confidential all financial/personal information obtained under or in connection with the VIC Regulations

If the parties can’t agree, a party may refer the dispute to a mediation facilitated by the Victorian Small Business Commission (“VSBC”) and failing that being successful, the usual court process.

• The VIC Regulations don’t apply to any leases entered into after 29 March 2020 except if the lease came about due to the exercise of an option, or a renewal on the same terms. This means that if you want a new deal to have regard to COVID-19 and its possible impact, you will need to deal with it specifically in the lease.