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Two recent opposing decisions of the NSW Supreme Court and the Victorian Supreme Court (Court of Appeal) have highlighted the importance of ensuring that lease provisions regarding the ownership of tenant’s chattels are drafted as accurately as possible. Whilst these decisions are set in the context of wind farms, the take-away message is that lease documents generally should be clear about the parties agreed intention as to ownership of any chattels brought onto the premises.

The two judgments revisit the law of fixtures, of which the key legal principle is that in determining whether particular assets are chattels or fixtures the objective intention of the parties must be ascertained, having regard to the degree of annexation of those particular assets and the purpose or object of the annexation. The main implication being that if a chattel has become a fixture the item becomes part of the land / the landlord’s property and the landlord has legal title to it.
In the AWF Case, the wind turbines and certain associated wind farm infrastructure (‘assets’) were held by the Court to be chattels (and not fixtures/improvements to the land) based primarily on the following factors:

• the lease and planning permit required the tenant to remove the assets
• the tenant was entitled under the lease to renew, replace or remove the assets during the lease term
• the assets were designed and installed in a way that allowed them to be removed without damaging either the assets or the land
• the design working life of the turbines corresponded with the lease term
• the second-hand value of the assets was greater than or equal to the cost of removing them
• in any event, there is specific legislation in Victoria which overrides the common law position and deems the assets as being items owned by the tenant

The decision in the AWF Case contrasts the earlier decision in the SPIC Case where it was held that similar wind farm assets became fixtures (albeit tenant’s fixtures which entitle the tenant to remove the assets from the land). Although the respective Courts’ viewed certain facts differently, one minor but legally significant point of difference was the divergence on whether the removal of the turbines / turbine foundations would cause any substantial damage to the surrounding land.

In addition, a further legally important difference was in relation to the weight that each Court gave to the respective lease provisions. The Victorian judges found it acceptable to place more emphasis on the lease provisions when determining the parties’ objective intentions. However, the NSW judges considered that less reliance should have been placed on the lease provisions.

The above decisions demonstrate the importance of clear drafting in lease documents, to minimise the risk of costly and protracted disputes and the uncertainty in leaving such matters to be decided in Court. If anything, careful and accurate drafting would provide some valuable supporting evidence towards assessing the parties’ objection intentions, particularly within the above context of high value renewable energy development infrastructure.

There are a number of significant changes to the FIRB approval framework taking effect from 1 January 2021.

One of the most significant changes is that the temporary $0 monetary screening thresholds on most foreign property investment revert to the usual thresholds which applied pre-29 March 2020 (ie the ‘pre-Covid’ thresholds already in place).

The $0 threshold will remain for sensitive national security land or businesses, meaning foreign investors will continue to require FIRB approval for these types of acquisitions regardless of value.

There have also been significant changes to the fees payable for FIRB applications – now by way of a ‘tiered’ structure tied to the value of the property which is likely to result in higher fees for most commercial property transactions, in particular higher value transactions.

The Retail and Other Commercial Leases COVID-19 Regulation (No 3) 2020 (NSW) takes effect from 1 January 2021 and, in many ways, operates as an extension of the existing Covid-19 tenancy regulations but with some critical changes.

Importantly, the scope of the Regulations are now substantially narrowed and only apply to retail tenants who:

• are eligible for Jobkeeper based on the new eligibility criteria from 4 January 2021 (ie regardless of previous eligibility)
• had a turnover in the 2018-19 financial year of less than $5 million (previously the cap was $50 million)

Despite the title of the legislation suggesting otherwise, the new Regulations do not apply to commercial leases – however commercial tenants will still have certain rights preserved under the existing framework depending on the circumstances (eg the right to apply for mediation in the event of a dispute).

The new Regulations will expire on 28 March 2021 unless they are further extended or replaced.

 

The Retail And Other Commercial Leases COVID-19 Regulation 2020 (NSW) (NSW Regulations) were amended on 3 July 2020 to clarify that:

• a tenant is required to give a landlord evidence to prove its status as an “impacted lessee”; and
• certain parts of the legislation are only meant to govern leases with “impacted lessees” (and not other leases).

These amendments remove some of the ambiguities that we referred to in our April update but unfortunately the government has still chosen to not be prescriptive on the exact nature of the “evidence” or timing requirements. Many landlords and tenants are acting cooperatively and collaboratively and have already finalised and documented rent relief deals despite the lack of guidance within the NSW Regulations, but we expect that the lack of prescriptive requirements on documents and timing will continue to cause landlords and tenants some difficulties as they try to deal with the economic fallout from the COVID-19 pandemic.

The Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (QLD) (QLD Regulations) came into effect on 28 May 2020.

The QLD Regulations largely mirror similar laws introduced by other States and Territories to implement the National Cabinet’s Code of Conduct for commercial tenancies, however there are a number of important differences that QLD landlords and tenants will need to be aware of.

Who is an affected lessee?

The QLD Regulations apply to “affected lessees”, being a tenant under a commercial or retail lease where the tenant has a turnover of less than $50M and is eligible for JobKeeper.  For the purposes of the turnover test, if the tenant is an entity connected with (or an affiliate of) another entity it will be the aggregate annual turnover of those entities.

If an affected lessee breaches the lease by ceasing trade or not paying rent/outgoings (wholly or partly) during the period 29 March 2020 to 30 September 2020, a landlord is prevented from (amongst other things) doing or continuing the following actions:

• evicting / re-entering / terminating
• seeking damages
• charging interest
• drawing on lease security
• enforcing a personal guarantee or indemnity in a lease

unless the landlord has made a genuine attempt to negotiate and the tenant has substantially failed to comply with the negotiation process.  Rent also cannot be increased during this period (except turnover rent).

Negotiation process

The QLD Regulations impose obligations on landlords and tenants to cooperate and act in good faith in all discussions and actions associated with mitigating the effect of the COVID-19 pandemic on each other.

Either party can trigger the renegotiation process and, once triggered, the parties must both give each other information relating to the request that is true, accurate and sufficient to enable the parties to negotiate in a fair and transparent way.

The QLD Regulations helpfully give examples of the information required, namely turnover information, evidence of JobKeeper eligibility and details of steps the tenant has taken to mitigate the effects of the pandemic.  A tenant may also apply for further rent reduction if circumstances materially worsen after an initial agreement is reached – but notably, they do not deal with the alternate scenario of circumstances improving for the particular tenant.  Landlords should consider this issue in reaching and documenting any agreement with tenants.

Differences in the QLD Regulations

One of the most critical changes the QLD Regulations impose is that landlords must offer tenants an extension to the term of the lease on the same conditions as those contained in the lease equivalent to the period for which rent is waived or deferred.  The only exception to this absolute obligation is where the landlord would be in breach of another legal obligation in doing so, or if the landlord demonstrates that the lease cannot be extended because it intends to use the premises for a ‘commercial purpose of the landlord’.

Some other interesting differences about the QLD Regulations when compared to other jurisdictions:

• they expressly apply to agreements for lease where the lease has not yet commenced or come into effect
• whilst the other jurisdictions have regard to the turnover of a franchise operation at the franchisee level, for the purposes of determining whether turnover is under $50M, the QLD Regulation go further and state that if premises are leased to a franchisor and then subleased to a franchisee who is an affected lessee, the franchisor is also treated as being an ‘affected lessee’
• deferrals must be offered over a minimum period of 2 years (but no more than 3 years)
• the landlord’s rights in respect of a security deposit are preserved until such time as the deferred rent has been repaid – albeit the position is silent on bank guarantees which may have expiry dates
• there is a strict 30 day timeframe for the landlord to formally offer the tenant a reduction once the negotiation process has been triggered and a party has provided “sufficient information” about the rent relief request
• there is a much more prescriptive mediation and dispute resolution process for any disputes

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.

Current strata laws require face to face meetings unless a scheme has passed a resolution to permit meetings to be carried out by alternative means (eg electronic meetings via video or teleconference). NSW Fair Trading have released guidance notes (https://www.fairtrading.nsw.gov.au/resource-library/publications/coronavirus-covid-19/property) confirming that schemes in this position have no other option than to attend an “in-person” meeting.  This obviously presents a compliance issues for these strata schemes given the public health orders relating to social distancing. So, it seems that strata schemes need to take a proactive approach.

In terms of a practical way forward, we suggest that you consider holding a single motion meeting where the only motion on the agenda is a motion to agree to allow electronic meetings. This should be non-contentious in the current climate. The meeting will need to be carried out via a proxy vote, so that it does not contravene the relevant public health orders.

Whilst there are limits on how many proxies a person can hold, it is of course possible to adjourn and re-convene the meeting without a quorum being present which means the meeting can go ahead without a quorum as long as there is a chairperson and proxy vote in play.

If your scheme is unhappy about moving to electronic meetings or allow a proxy-only meeting to proceed, then you might consider arranging an informal catch up with lot owners to consider the alternative…. no meetings.

The long and short of it is this – if you can’t hold electronic meetings, then you may not be able to hold any meetings. No means = no decisions = chaos.

The Retail And Other Commercial Leases COVID-19 Regulation 2020 (NSW) (NSW Regulations) became law on Friday 24 April 2020. With the passing of these NSW regulations, NSW is the first of the States and Territories to finally bring the National Cabinet’s “Code of Conduct” (Code) into law. We expect the other States and Territories to follow suit soon.

The NSW Regulations target “impacted lessees”, that is, a tenant who has turnover of less than $50M and is entitled to JobKeeper (eg a business where turnover drops by 30%).

If an impacted lessee breaches the lease by not paying rent / outgoings, or ceasing to trade, for the period 24 April 2020 to 24 October 2020, then a landlord is prevented from (amongst other things):

• evicting / re-entering / terminating
• seeking damages
• charging interest
• drawing on lease security
• enforcing a personal guarantee

Even after that period has ended, the landlord still won’t be able to take any of the actions set out above for rental arrears during that relief period (ie 24 April 2020 to 24 October 2020) unless the landlord has complied with an obligation to “renegotiate” the rent and the other terms of the lease having regard to:

• the economic impacts of the COVID-19 pandemic; and
• the principles set out in the Code.

Either party can trigger a renegotiation process. Whilst this will normally be the tenant triggering the process, it is possible that landlords may also want to trigger the process, particularly for tenants likely to be “impacted lessees”, given that landlords may be restricted from exercising rights to recover arrears where they cannot show compliance with the requirement to “renegotiate”.

Each of the landlord and tenant must act in good faith during the renegotiation process. If the parties can’t agree, then there are two alternative dispute resolution processes – one for leases captured by the Retail Leases Act 1994 (NSW) (RLA), and one for all other leases – where RLA leases go through the usual dispute resolution process (ie mediation / NSW Civil & Administrative Tribunal (NCAT)) and where non-RLA leases go to a mediation facilitated by the Small Business Commissioner and failing that being successful, the usual court process (if either party instigates litigation).

The rent for an impacted lessee can’t be increased within the period 24 April 2020 to 24 October 2020 (ie any rent increase which would have normally occurred in that period is delayed until 25 October 2020 and the landlord can’t “claw back” that unpaid increase amount for that protected period). This doesn’t apply for turnover rent.

For any impacted lessee who pays fixed amounts for statutory charges (land tax, rates etc) or landlord’s insurance, that lessee is entitled to a reduction in that fixed amount if the landlord was able to get a reduction of the statutory charge / insurance. We suspect this right will be rarely used as most tenants pay outgoings on the basis of estimates, with a “wash up” at the end of the outgoings year.

The NSW Regulations don’t apply to any leases entered into on or after 25 April 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.

Importantly, landlords and tenants can contract out of the NSW Regulations – and in reaching an agreement, parties are unrestricted as to the terms of such agreement, even if it is something that the NSW Regulations or Code would prevent (eg termination, bank guarantee draw down, rental increases etc).

The NSW Regulations also make it clear that anything a tenant does to satisfy a legal requirement in relation to COVID-19 cannot be a breach of the lease, regardless of what the lease says.

There is some ambiguous drafting in the NSW Regulations, possibly as a result of the speed with which the legislation was passed and the fact that it was never subject to the normal industry review process. As a result of the ambiguity, the NSW Regulations could apply more broadly and more flexibly than the commentary has suggested, both in terms of who might benefit (in addition to “impacted lessees”) and what might be prevented or allowed. It will be interesting to see whether landlords and tenants seek to take advantage of the various ambiguities and whether those who “push the boundaries” are ever tested in a court, or whether the leasing market just works things out for itself, as it often does.