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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.

South Australia has passed legislation in relation to commercial and retail leases to put a “stop” on the landlord taking certain actions under a commercial lease, however at the time of publishing this article, it has not yet legislated the new national Mandatory Code of Conduct (National Code).

The new legislation which has been introduced is the Covid-19 Emergency Response Act (SA) 2020 (the Act). A copy of the legislation can be found here.

The section dealing with commercial leases (section 7) has retrospective application from 30 March 2020.  The Act will cease to apply on a day determined by the Minister, or 6 months after its commencement, whichever is earlier.

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

We summarise the position below:

Financial hardship

The provisions of the Act only apply if the tenant is facing “financial hardship” as a result of COVID-19. A tenant is taken to be in “financial hardship” if the tenant is eligible for, or receiving, a JobKeeper payment in respect of the business.

This usually means, amongst other things, in order for the Act to apply turnover will need to have reduced by as follows:

• 30% fall in turnover (for an aggregated turnover of $1 billion or less)
• 50% fall in turnover (for an aggregated turnover of more than $1 billion)
• 15% fall in turnover (for ACNC-registered charities other than universities and schools).

It appears that the SA Government has chosen to be less restrictive than what was envisaged in the National Code (which limits eligibility for protection to those tenants with turnover of up to $50 million only). This of course means that more tenants in SA will be eligible for protections afforded by the Act as set out below. However,  the SA government is yet to legislate the National Code’s rent waiver and rent deferral requirements, and it is possible that when they do, the eligibility requirements may be further limited to more closely align with the National Code.

Prescribed action

If a tenant is suffering financial hardship as a result of COVID-19, 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
• any other act or omission prescribed by the regulations

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 (eg an obligation to keep the shop open and trade) 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 laws of South Australia

If the landlord had started any of the above actions but they hadn’t been finalised by 30 March 2020, then that action is suspended until the Act no longer applies.

Rent freeze

Rent must not be increased during the prescribed period (excluding turnover rent) unless agreed between the parties.

Land tax

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 in relation to any disputes that have arisen as a result of COVID-19.

Tasmania has acted first in relation to introducing laws regarding rental and eviction relief in Australia as a result of Covid-19 impacts. The Covid-19 Disease Emergency (Miscellaneous Provisions) Act (Tas) 2020 (Covid-19 Emergency Act) is in force and valid from 27 March 2020.

Eviction freeze

From a commercial property perspective, the key points of the Tasmanian Covid-19 Emergency Act are:

• the new legislation contemplates a prohibition on termination and rental increases for certain leases – this appears to be intended to cover commercial/retail (and potentially other non-residential) leases
• the Minister may, by notice, prohibit termination or rental increases for leases within a class of lease in specified circumstances during the “emergency period” – we do not yet know what “class of leases” are affected
• the emergency period (ie the eviction “freeze period” will be at least 120 days from commencement of the Act, but it might be longer – we do not yet know what the period will be)
• the Act doesn’t appear to provide for any form of rent abatement (with the effect presumably to be that any unpaid rent will continue to accrue throughout the emergency period) – this is likely to be of limited benefit to tenants in the long run if revenue has been seriously affected by Covid-19 (ie these measures might just delay the inevitable termination of the lease if the arrears can’t be paid at the end of the “freeze” period).
• the Act does not (at this stage) appear to restrict the landlord from drawing down on bank guarantees for a failure to pay rent during the emergency period, and it may be that landlords do choose to use the security to protect themselves for the arrears during any freeze period.

Note that the “emergency period” during which specific protections appear to apply starts on (and from) the date of commencement of the Covid-19 Emergency Act, therefore arguably a termination notice issued prior to 27 March 2020 should remain valid.

Land tax measures

The Tasmanian Government has also announced that Land Tax will be waived for commercial property for the 2020-21 financial year, where the business owner:

• is liable for the land tax; and
• can demonstrate that their business operations have been affected by COVID-19.

It’s unclear at the moment who might be captured by the definition of ‘business owner’ but we expect that it would target commercial tenants who are liable to pay land tax via outgoings under their lease.

We will update this article as further developments arise.

The NSW Government has passed a Bill this morning amending various existing legislation to create special regulation-making powers.  In short (and most relevant to commercial property) is that it allows the Government to make regulations which may:

• prohibit a landlord terminating or exercising another right under a lease
• exempt a tenant from compliance with certain obligations under a lease (presumably this will focus on rent).

These powers will apply to leases made under the Retail Leases Act and more broadly any legislation relating to “the leasing of premises or land for commercial purposes”.  These powers could therefore extend to non-retail leases.

We will update you when regulations are made and when we know which types of tenancies will be affected and how.

 

Partner, Leisha de Aboitiz and Lawyer, Rachael Bass, recently wrote an article published by the REINSW in relation to recent NSW Government reforms on flammable cladding.  Read the article here:

REINSW – The fiery fallout of combustible cladding

New combustible cladding regulations commence in NSW today.  The regulations will impact you if you (wholly or partially) own a building which contains combustible cladding and is used as a residence, accommodation or some other use where people may sleep or gather e.g. hospital, school, night club, aged care building etc. The regulations will not affect certain classes of buildings (eg commercial office buildings), but will capture strata schemes and mixed use buildings which have an affected component. If your building is affected, then you may need to register your building. Further information on the new laws and applicable timeframes for compliance can be found here – https://www.planning.nsw.gov.au/Policy-and-Legislation/Buildings/Combustible-cladding.

You should also be aware that certain aluminium composite panels were banned in NSW on 15 August 2018 across most building classes (eg commercial as well as residential).  If your building is affected by the ban you may be ordered to rectify the building.  Further information on the product use ban can be found here – https://www.fairtrading.nsw.gov.au/buying-products-and-services/product-and-service-safety/building-products/aluminium-composite-panel-ban.  New combustible cladding laws have recently been introduced in most jurisdictions of Australia, and audits are being carried out Nationally. The nature and extent of regulation varies, however certain States are clearly taking a more proactive (and robust) approach to cladding regulation.

If you think that your building may be affected, then you should consider your compliance obligations in relation to the new laws as well as any related contractual obligations you may have (eg under any leases or insurance policies for the building).

For further information on new combustible cladding laws and your obligations as a private building owner please contact Leisha de Aboitiz or Rachael Bass.

 

Massons are tracking the progress of two related strata renewals which are currently being considered by the Land & Environment Court. They relate to the acquisition of 2 x strata schemes sitting side by side in Macquarie Park. The proceedings are only in the initial stages. To date, there have been some interlocutory proceedings regarding applications for dissenting owners and the purchaser/developer to be joined to the proceedings and related cost considerations. The outcome of the interlocutory proceedings are not particularly surprising – all parties were joined and it was held that the owners corporation would be required to meet the costs incurred by the dissenting owner in bringing the Notice of Motion (per s188 of the SSDA). It will be interesting to watch this test case unfold.

You can read the decisions on the NSW Caselaw website here:

https://www.caselaw.nsw.gov.au/decision/5a8a56c7e4b087b8baa8643a

https://www.caselaw.nsw.gov.au/decision/5a8a1f62e4b058596cbae49b