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South Australia – COVID-19 Update – Commercial Tenancies

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 – Landlord and Tenants – Covid-19 Disease Emergency Act

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.

New South Wales – Landlord and Tenants – Covid-19 – Bill passed

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.

 

Combustible cladding laws and private building owners

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.

 

Strata Renewal & Collective Sales: news from the Land & Environment Court

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

 

Is there a loophole in the new strata laws?

A recent decision by the NSW Civil and Administrative Tribunal has sparked concern about a potential loophole in the new strata legislation that might allow unruly lot owners to ignore NCAT orders without penalty. The new strata legislation came into force on 30 November 2016 (find out more here).

As a result, the owners corporation sought an order to impose a pecuniary penalty for contravention of the adjudicator’s order under the Strata Schemes Management Act 2015 (NSW) (SSMA 2015), or (in the alternative) under the 1996 Act.

The Tribunal decided to impose the penalty under section 202 of the 1996 Act having regard to the transitional provisions in the SSMA 2015 and section 30(1) of the Interpretation Act 1987 (NSW).

However, a key issue raised in the Tribunal’s decision was that the penalty amount could not be recovered under section 248 of the SSMA 2015 because the owners did not have standing as an “authorised officer” to commence proceedings under section 77 of the Civil and Administrative Tribunal Act 2013 (CATA). An authorised officer who could commence proceedings is the Minister, or a person with the appropriate written consent per section 76 of the CATA. This had led to industry-wide speculation about a potential enforcement loophole in existing legislation.

You can read the full decision here.

Does this mean you can ignore an NCAT order to comply with a by-law?

No. For breaches that have occurred (or will occur) since commencement of the SSMA 2015 there is a new regime for by-law enforcement which involves a different protocol (initiated by the owners corporation) and penalties, which are recoverable as a judgment debt.

For enforcement of by-law compliance orders made prior to the commencement of the SSMA 2015, it would seem the 1996 Act provisions will operate pursuant to the transitional provisions in the SSMA 2015 (as outlined in the Anderson Decision).

How does the new regime for by-law compliance work?

Under the new regime, by-law enforcement is initiated by an owners corporation issuing a Notice to Comply (per section 146 of the SSMA 2015). If a person continues to breach a by-law breach after a Notice to Comply is issued, then the owners corporation may apply to NCAT (per section 147 of the SSMA 2015) to seek an order for the offending person to pay a penalty of up to $1,100.

If there is a further by-law breach within 12 months after NCAT imposes an initial penalty, the owners corporation may make an application for the Tribunal to impose a further penalty of $2,200. A penalty imposed under section 147 of the SSMA 2015 may be registered and enforced as a judgment debt (see section 78 of the CATA).

We understand that the new regime was intended to streamline enforcement with a view to side stepping some of the complexities (and expense) around seeking orders to initiate an enforcement process.

So where to from here?

Despite the new SSMA 2015 regime for by-law enforcement, industry concern remains for:

  • The adequacy of the mandated penalties contemplated in section 147 of the SSMA 2015 for extreme or prolonged breaches of a by-law (e.g. what if the benefit of the breach outweighs the maximum penalties contemplated in SSSMA 2015?)
  • Whether or not there are enforcement issues arising from the relatively narrow category of an “authorised officer” (per s77 of the CATA).

It has been reported in the media that NSW Fair Trading is considering whether statutory amendments may be warranted in 2018 in light of certain statements made in the Anderson Decision.

However, it is unclear what form these amendments will take, or if any will be considered necessary. So for the moment, it’s a case of “watch this space…”, and be aware of the Anderson Decision and how it might impact you.

Changes to the Conveyancing (Sale of Land) Regulation 2017

The Conveyancing (Sale of Land) Regulation 2017 was published on 28 July and will come into effect on 1 September 2017. The regulations contain changes to vendor disclosure requirements and include new prescribed documents that must be included in contracts for the sale of commercial or residential properties. It is important to stay up to date with these changes to avoid a potential breach that could occur if you fail to include prescribed documents or warning statements.

Changes to Schedule 1 of the regulations contain new provisions for sewerage diagrams and strata by-laws, and have also introduced new warning requirements for loose-fill asbestos in certain properties.

Sewerage Service Diagrams showing the location of sewer lines in relation to the property are now required in addition to previously required sewerage infrastructure location diagrams (or ‘service location diagrams’), whenever both are available from the relevant authority. The two diagrams must be attached to the contract as prescribed documents.

In addition to this, a new warning requirement has been added with the introduction of a ‘loose-fill asbestos insulation warning’. This warning must be attached to the contract to alert parties to the possibility of Loose Fill Asbestos being present in the property and will be required in contracts exchanged on or after 1 September 2017. The previously required warning statement relating to Swimming Pools is no longer in the Regulation.

If you fail to include one of these prescribed documents in the contract, the purchaser is given a right to rescind the contract within 14 days of exchange.

The changes also relate to contracts involving strata schemes. The regulations now require that all strata by-laws in place for a strata scheme must be attached to the contract. Previously, only some exclusive-use by-laws needed to be included. Schedule 3 has also been amended to include new adverse affectations that a vendor must disclose, or otherwise warrant that they do not affect the land. These include situations relating to Strata Renewal, where the owners’ corporation have established a committee to conduct further investigation on a strata renewal proposal, but there are no minutes recording this resolution. Other adverse affectations added include orders under s121B of the Environmental Protection and Assessment Act 1979 (Item 12), and Rights of way under s235C of the Mining Act 1992 (Item 17).

For further information on these changes or the regulations contact Jodie Masson or Kate Clissold.

Reminder for those with Victorian leases – is your lease a retail lease?

Under the Retail Leases Act 2003 (Vic) (RLA) “retail premises” are defined to mean premises that are used, or are to be used, wholly or predominately for the sale or hire of goods by retail or the retail provision of services.

So what does this actually mean?

Last year, the case of IMCC Group (Australia) Pty Ltd v CB Cold Storage Ltd [2017] VSCA 178, made it clear that the ‘ultimate consumer’ test is now the principle test to be applied to determine whether a tenant is undertaking a ‘retail’ business for the purposes of the RLA.

As a result of this case, a large number of leases that were previously not thought to be retail, will now be governed by the RLA.

What is the ultimate consumer test?

Case law has established that “retail” essentially means the provision of a good or service to the ultimate consumer for a fee or reward.

The “ultimate consumer” does not need to be a member of the public. In other words, it does not matter if the good or service is provided to another business who uses that service for their own business purpose. A business to business transaction could result in retail business.

What does this mean?

In short, if the answer to either of the following questions is “yes”, then it is likely that the business will be a retail business and the RLA will apply:

  • are the goods or services consumer by the purchaser; or
  • are the goods or services being used by the purchaser as input in the purchaser’s business.

Accordingly, this means that:

  • most businesses that provide services in Victoria will be found to be “retail” and will be governed by the RLA (unless another exemption applies); and
  • business that supply goods to a second business that use those goods as input into the second business are likely to be “retail”.

It is important to note that including an acknowledgment in your lease that the RLA does not apply will not save you from application of the RLA.

Implications for landlord and tenants

Landlords and tenants should carefully review any leases that may be subject to the RLA and consider if the RLA will apply.

The RLA is generally considered to be “tenant friendly”. In other words, tenants will usually have more protections under a lease governed by the RLA, than one which isn’t.

For those leases that are already on foot, some key things for both parties to consider are:

  • Under the RLA a tenant is not required to pay for land tax. Landlords of leases that are now clearly captured by the RLA may find that their tenants are now requesting refunds for land tax already paid
  • If the term of the lease is less than 5 years, the RLA automatically extends the lease to a 5-year term

For those leases that are currently being negotiated, the parties should carefully consider if the RLA will apply and if so, take the provisions of the RLA into account when negotiating clauses. Landlords may wish to narrow the permitted use to make it clear that premises cannot be used for a retail purpose.

If your lease was entered into prior to commencement of the RLA in 2003, it is good idea to speak to a lawyer before agreeing to any variation of that lease (as a variation may result in the RLA applying).

If you suspect that any of your Victorian leases may now be found to be “retail”, and would like further advice on the implications under the RLA, please contact us.

Strata building defects off to a false start

The new building defects regime for strata schemes is supposed to start on 1 July 2017. However, a bill is currently sitting in parliament which (if passed) will delay commencement until 1 January 2018.

It won’t be debated in the legislative assembly until 20 June 2017 at the earliest, which means stakeholders will be left waiting until the last minute to find out whether they will need to comply as at 1 July.

The new regime is primarily set out in part 11 of the Strata Schemes Management Act 2015 (NSW) (‘Defects Regime’), and the bill which contemplates pushing out the commencement date for this regime is the Electronic Transactions Legislation Amendment (Government Transactions) Bill (‘Bill’).

It has already been passed by the state legislative council, but it won’t be debated in the legislative assembly until 20 June 2017 at the earliest.

When do strata managers need to be across this?

Despite an approaching and uncertain start date, it will be some time (perhaps years) before strata managers start to see this regime impacting their practices.

It is intended that the Defects Regime will only apply to construction contracts signed, or works that begin, on or after the commencement date of the regime (i.e. on or after 1/7/17 or 1/1/18, depending on whether the Bill is passed).

It follows that a strata manager will not be involved in implementing or monitoring compliance with the new regime until after construction is complete and the new strata scheme is established.

How will the scheme work?

We think it is highly likely that the Bill will be passed before the 30 June deadline and therefore the commencement date will be pushed out to 1 January 2018 – but here’s a quick refresher on how the Defects Regime will work just in case it isn’t delayed.

The law will apply to any building work carried out on strata scheme buildings that are wholly or partly residential (including mixed use buildings), unless they are eligible for home warranty insurance (or would be eligible save for the contract price being below the specified threshold).

Developers will be required to provide a ‘building bond’ (equal to 2% of the contract price of the building work prior to an occupation certificate being issued) to the Secretary of the Department of Finance, Services and Innovation (‘Secretary’).

Developers will be further required to appoint an independent building inspector within 12 months after the completion of the building work.  Assuming the appointment is not contested, the inspector must carry out inspections on the building work and provide interim and final reports to the Secretary.

One of the main reasons for the proposed delay to Part 11 is to give Standards Australia enough time to complete the new national standard they have been working on known as AS4349.2 – Group titled properties. The standard will form part of the defect inspection report that is applied by the scheme.

If the report identifies defective building work, the building bond can be used in part or in full by the Secretary to compensate the owners corporation for any cost incurred towards rectification. However, the Secretary may refuse or reduce a claim on the building bond if the developer is unreasonably refused access to the scheme to rectify the work themselves.

The building bond must be returned (in whole or in part) if it is not used for rectification, there is surplus remaining after rectification works are completed, or certain timeframes or other provisions in the legislation apply which trigger its return.

DISCLAIMER
This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought having regard to any particular facts or circumstances.