COVID -19 Lease Legislation Summary
On 28 May 2020, the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) (“the Regulation”) was introduced into Queensland law. Taking a few weeks longer than anticipated, the Regulation went beyond what was expected, or at least what was noted by the Mandatory Code of Conduct. The Regulation has a very tenant favoured basis, and grants some significant powers, even going as far to provide avenues for landlords and tenants to be ordered to pay compensation by the Queensland Civil and Administrative Tribunal (“QCAT”) if their conduct during the COVID-19 pandemic in negotiating rent is deemed unconscionable or is not in good faith.
The Regulation appears hastily prepared and in many cases contradictory. I suspect it has been done so deliberately and still places the onus on the parties to resolve as best they can. However, unlike other states, there is no longer simply an obligation to negotiate. QCAT has been granted powers to make decisions if the parties can’t. This is a significant variance from other states legislation.
The advice being covered in this summary is a follows:
- What leases qualify?
- Broad effects of the Regulation.
- Negotiation request (including right of subsequent negotiation)
- What information is needed to be provided.
- Obligation on Landlord to make an offer
- Repayment arrangements for deferred rent.
- Validity of existing agreements and right to review
- Contracting out of the Regulation – yes it is permitted.
- Failure to agree – compulsory mediation.
- Still no agreement – very broad powers granted to QCAT to resolve the issues and make orders.
- Parties being difficult? Act in a poor manner at your own peril
The Regulation provides a very simple basis for application. For a lease to be covered by the Regulation, the lease must be:
- a “retail shop lease” or “prescribed lease”. A “prescribed lease” is any other commercial lease under which the leased premises are to be wholly or predominantly used for carrying on a business;
- the lessee under the lease is an SME entity (generally less than $50 million turnover annually);
- the lessee is eligible for the Jobkeeper scheme
Put simply, if a tenant is receiving Jobkeeper payments, the Regulation automatically deems the lease as an affected lease. Franchise leases are also covered by the Regulation (but note they have specific rules which is not intended to be covered in this advice. Please contact us if you require additional advice in this regard)
- Broad Application
The Regulation operates in three important avenues.
- Restriction on recovery action / breaches
Firstly, it restricts landlord’s from taking steps under a lease where the failure of a tenant to meet their obligations is directly due to the COVID-19 pandemic. For instance, if a tenant cannot pay their monthly rent for April and May, due to COVID-19 restrictions, and landlord has issued a breach notice, the landlord cannot proceed with any enforcement until 30 September 2020, being the end of the “response period” (which started on 29 March 2020).
However, if a tenant breached their lease in a way not related to COVID-19, a landlord is within their rights to issue a breach notice and continue with enforcement due to that breach.
- Restriction on rental increases
The Regulation also restricts a landlord from increasing rent payable by a tenant during the response period. If there is a review of rent scheduled during that period, a landlord can review the rent but cannot actually give effect to any increase. This means that the rent is increased, however, the increased amount does not take effect until after 30 September 2020. No recovery of any amount due before this date is possible.
- Right to negotiate variations
It also makes it mandatory for tenants and landlords to act in good faith in all discussions and actions that relate to mitigating the effect of the COVID-19 emergency on parties to the lease. This means that both parties are required to actively negotiate to work out a positive resolution for both parties.
Please note this is not simply rent variations but any lease term that may have an impact. This could include extensions or reductions of current terms, changes to option periods, reduction in areas no longer needed etc. This is set out in more detail in the next item.
As noted above (and discussed further below), the Regulation grants an avenue for both landlords and tenants to be required to pay compensation if they breach these obligations or are found to have acted unconscionably.
- Negotiation Requests
(a) Initial request
The Regulation provides either party (but likely first contact will be by tenants) with an ability to request a negotiation between the parties to discuss the rent payable and other conditions under the lease. This has a dramatically broad reaching application, as the Regulation allows a tenant to request ‘other stated conditions’ of a lease.
Other stated conditions may include a number of different provisions under a lease. For instance, a tenant could request changes to the defined use – various businesses are utilising new methods to keep up a cash flow during the COVID-19 pandemic and it is possible that they may look to update the defined use to ensure they can keep these new cash flows coming in.
A request could also be in relation to a change to the calculation of the rent review, as tenants may no longer be willing to maintain previous figures in light of a potential upcoming recession as a result of the COVID-19 pandemic.
With a large percentage of the workforce now working from home, some with no apparent intentions to come back into the office, it may be distinctly possible that tenants simply don’t need as much office space as previously required and may request the area under the lease be changed. This may also occur if a lease includes an outdoor area, as they are no longer able open certain aspects of their business due to COVID-19 conditions.
Tenants (and landlords) can also negotiate the term of the lease. If the lease ends during the response period, a request can be issued from either party to extend the lease. As the COVID-19 economic effect continues to be seen, many tenants and landlord may be apprehensive of the possibility to obtain new tenants/new leases in such an uncertain time, and it is likely that many will seek an extension to their leases to weather the storm until the economy has recovered.
The Regulation also allows Landlords of an affected lease to make a negotiation request, however, as it is mainly tenant focused there may be limited avenues where a landlord can make such a request for their benefit. However, potential avenues that may apply are discussed below.
Should you receive a request for an amendment to the terms of the lease, it is important that you seek legal advice to ensure that the amendments to be made are consistent and don’t disrupt the operation of the lease.
- Subsequent requests
The Regulation does allow further requests to be made – so its not a once and for all situation at the first point. This does make sense as circumstances can and have changed rapidly. It also specifically refers to “parties’ so this also allows a landlord to a lease to make an application under the Regulation for a subsequent lease negotiation. This provides an interesting avenue in the circumstance where a landlord has provided a rental relief to tenant and this relief over compensates for the actual loss of the tenant over the response period (29 march to 30 September) .
For instance, and continuing with the café analogy, the tenant and landlord may negotiate a 20% reduction for 3 months as the café is only able to operate as takeaway and has lost a significant portion of its business. However, after the first month restrictions for this particular café have been lifted and the café is now able to operate in a similar fashion to before. This café then experiences an increased return to its previous trading placing it in a net positive position due to the increase in trading and reduced rent.
The main purpose of the Regulation is to mitigate the effects of the COVID-19 emergency on landlords and tenants under affected leases, and having a landlord take the brunt of the financial loss due to the pandemic while a tenant enjoys a benefit is not consistent with the Regulation. As such, it is possible that a landlord may ask a tenant actually increase their rent so the parties both return to a mutual position.
While the Regulation does not provide specific provisions for such a scenario, it does explicitly say that nothing within the Regulations prevents parties from negotiating an increase in rent and as such landlords may be able to utilise this provision.
- Information Exchange
Once a negotiation request is received, parties to a lease must give each other information to a lease that is true, accurate and correct. It must be sufficient to enable the parties to negotiate in a fair and reasonable way and cannot be misleading to either party.
This ‘Information Exchange’ appears to be intended to provide equal grounds for a negotiation between a landlord and a tenant. As a starting point, any request should have clear and defined information and details on what the particular request is – whether it be a request for a waiver, a deferral, or something else entirely. The Regulation does not provide strict definitions on what should be provided by a landlord or a tenant in support of this request however, some examples of what may be required are below.
- Tenants Information
To be able to qualify as an affected lease under the Regulation, a tenant will need to evidence that they have been receiving the Jobkeeper payments from the federal government. Once this is established, they should provide sufficient financial information to show an actual loss due to the COVID-19 pandemic. This should not be particularly difficult, as tenants have to show a 30% loss of turnover to be eligible for the Jobkeeper payment in the first place.
However, the information should be equivalent to the actual request made by a tenant. A tenant providing one month’s reports when requesting a 3 month, 30% reduction in rent is unlikely to be considered sufficient information under the Regulation. Requesting a reduction of the area to the lease but only providing financial reports is also unlikely to be sufficient information. Tenants and landlords should ensure that the information exchanged is actually relevant to the request being made, and this information allows the parties to negotiate in an open and honest manner.
The National Code did indicate that reports from recognised accounting software packages would be sufficient evidence. There is no obligation for it to be certified by accountants but there may be circumstances where this is reasonable. It appears the intent in the National Code, in particular for small enterprises to minimise cost in relation to the request being obtained. This has not been reflected in the Regulation.
The Regulation also provides further suggestions for information that franchisors and franchisees should provide, however, as these leases are likely to have particular terms and requirements, legal advice should be obtained to ensure that these obligations are met prior to entering into negotiations.
- Landlords Information
The Regulation doesn’t list particular details of what should be provided by a landlord to a tenant in responding to a negotiation request. However, the offer required to be provided under the Regulation (as discussed below) must consider the financial position of a landlord. Any attempt to withhold any relevant information would be in breach of the general obligation to act in good faith and may leave a landlord open to liability to pay compensation. As such, landlords should ensure they provide information as required.
Any personal or protected information exchanged between the parties must also be kept confidential and only used for the purpose of negotiations under the Regulation. Any unauthorised use of this type of information may result in a party being liable to pay a penalty under the Regulation.
The Regulation does unfortunately have conflicting provisions. Section 5 makes it a requirement that Jobkeeper and similar government benefits are not included in any calculation of turnover. However, this appears to be in determining they are an SME or not – which is confusing as the definition of SME refers to another Act and this obligation seems superfluous.
However, the Qld Government website goes beyond this and simply says turnover is not to include and benefits received. This means that while a café with 10 Jobkeeper eligible employees may be receiving the benefit, this is not to be included when determining what the turnover of that café is during the response period.
However, this appears to be contradicted by examples given in the Regulation itself, which suggests that when making an application for a rental (or other) negotiation a tenant should provide:
“information about any steps the lessee has taken to mitigate the effects of the COVID-19 emergency on the lessee’s business, including the details of any assistance being received by the lessee from the Commonwealth, State or a local government”
These two parts are in direct conflict with each other, which can make it hard to determine what should actually be provided by a tenant in making the application. Ultimately, tenants still have the requirement to act in good faith and all relevant information should be provided to ensure that a landlord can consider the full details of a tenants’ request.
It may well be that rent relief should still be offered in some kind of proportionality to turnover (as clearly indicated in the National Code), but this is far from clear.
- Landlord’s Offer
Once sufficient information has been received by a landlord in respect of a negotiation request, within 30 days the landlord must offer a tenant a reduction in the amount of rent payable, as well as proposed changes to any other stated conditions.
The offer must relate to any or all of the rent payable during the response period, and provide for no less than 50% of the rent reduction offered to be in the form of a waiver of rent.
The landlords offer must also have regard to:
- (i) all the circumstances of the lessee and the affected lease, including the reduction in turnover of the business carried on at the leased premises during the response period; and
- (ii) the extent to which a failure to reduce the rent payable under the lease would compromise the lessee’s ability to comply with the lessee’s obligations under the lease, including the payment of rent; and
- (iii) the lessor’s financial position, including any financial relief provided to the lessor as a COVID-19 response measure; and
- (iv) if a portion of rent or another amount payable under the lease represents an amount for land tax, local government rates, statutory charges, insurance premiums or other outgoings—any reduction in, or waiver of, the amount payable.
After an offer is received from a landlord, both a landlord and a tenant must cooperate and act reasonably and in good faith. The Code made it a requirement that any rental offers must be proportionate to the actual decline in turnover lost by a tenant. This would cause difficulty for some tenancies where profits fluctuate during the year (such as tourism businesses) or for businesses that have only been operating for a few months.
The Regulation operates differently, as noted above, to make any reduction of recent to be at least 50% waived, with the remaining 50% deferred. Practically, if a tenant provides information to a landlord that they have had a 30% loss in turnover, a landlord may agree to a 30% reduction in rent. 15% of the rent payable must be waived, with the remaining 15% to be repaid in line with the requirements noted at point 6.
- Repayment and Extension
Any deferral of rent under the Regulation is not required to be repaid by a tenant to a landlord until 1 October 2020. The payments must be spread over a period of at least two years but must be repaid within three. A landlord is also not entitled to charge interest or other fees on the amount of deferred rent unless the tenant fails to comply with the provisions of which rent is deferred.
Additionally, any waiver or deferral of rent may extend the period of operation for a lease. The landlord must offer an extension for a corresponding period of waiver/deferral. For instance, if a landlord agrees to waive the rent payable for the months of April and May, the tenant must be offered an extension two months.
This however will not apply where a landlord has prior existing obligations that are inconsistent to the extension, or the landlord can show the lease cannot be extended as they intend to use the property for a commercial purpose.
- Private Agreements – contracting out
Interestingly, the Regulation provides parties an avenue to ‘contract out’ of the requirements listed under the Regulation. However, this provision may not be as good as it looks.
It also does not affect an agreement that has terms inconsistent with the Regulation, whether that agreement was entered into before or after the Regulation was introduced. This means that parties can enter into agreements that go against the requirements of the Regulation, and that any previous agreements between a landlord and a tenant are not affected.
However, just because there is a previous agreement does not stop a party from being able to negotiate under the Regulation if they are a party to an affected lease. So if any term of that agreement is now no longer equitable a party may seek its review. Which seems to defeat the purpose of an agreement be binding as it is specifically stated to be able to be reviewed.
Bottom line – don’t assume any agreement is the be all and end all.
Should the parties fail to reach a resolution, the Regulation provides an avenue for parties to conduct a mediation to resolve the dispute between the parties. The mediation cannot be commenced unless parties have made an actual attempt to resolve the dispute. A landlord and tenant must cooperate and act reasonably in any attempts to resolve the dispute.
Put simply, a tenant cannot reject the offer made by a landlord and proceed directly to mediation – they must make an actual attempt to resolve the dispute prior to proceeding to mediation. In comparison, a landlord cannot give an unreasonable offer and when rejected by the tenant proceed to mediation – they must provide an appropriate offer, in good faith, in the view of actually resolving the dispute between the parties.
Landlords and tenants can be legally represented at the mediation, however, approval must be obtained from the mediator. The mediation will be communicated to the parties by the small business commissioner, a new department introduced by the Queensland Government. The earliest date the mediation will be held is seven days after the dispute notice is provided, and parties are able to extend this date if necessary.
Importantly, the Regulation also provides QCAT (or a superior court) the jurisdiction to grant costs payable to a party should a party fail to attend a mediation. This means that failing to attend the mediation when required could result in a party paying some of the other parties costs.
Failing to attend a mediation is also likely to breach the requirement to act in good faith, and could mean that compensation is payable should the lease dispute be heard by QCAT.
If the parties fail to reach a resolution at the mediation within 30 days, either a landlord or tenant can make an application to QCAT for orders that the lease dispute be resolved. Any application must be within 6 months of an affected lease ending, or the last day a tenant was required to pay deferred rent.
The 6-month period is important to consider, as it allows a tenant to continue with a dispute after a lease has ended. As noted below, QCAT have significant powers (including to rectify a lease) and landlords should be aware that even though a lease may have ended or is scheduled to end, if it is an affected lease, disputes may still be raised by a tenant for some time.
The Regulation gives QCAT the jurisdiction to hear and decide lease disputes. This jurisdiction comes with a substantial power to make orders that QCAT considers “just” to resolve a lease dispute. These orders include, but are not limited to:
- Making an order for a tenant or landlord to do (or not do) an act or thing;
- An order for a landlord (or tenant) to pay an amount, including compensation, to a particular person;
- An order for how the rent payable on an effected lease is to be calculated, with consideration of the tenant’s turnover (emphasis added as this seems to be contrary to the requirements a landlord must consider at the initial negotiation).;
- An order that a party is not required to pay an amount to another party.
These powers relate primarily to monetary issues, however, QCAT also has the ability to make certain orders about settlement between the parties, an order rectifying the lease, and an order on the determination of the current market rent.
- Unconscionable Conduct and obligation to act in good faith
The Regulation is similar to both the Code and the legislation in other states, however, it does go significantly further to allow QCAT to make orders if a party’s conduct is deemed “unconscionable” or not in “good faith”.
Should QCAT determine that a party has not acted in good faith and contravened these obligations under the Regulation, OR has been found to be acting unconscionably, they can order that a party pay an amount to a particular person.
In granting QCAT this power, the Regulation operates to restrict the parties’ actions in the negotiations. While other legislation made it a general requirement, this part operates to tell tenants and landlord to act in good faith – or else.
Should a matter proceed to QCAT, it is my view that the Tribunal would likely take favour with the tenant in most circumstances. As noted, the Regulation is particularly tenant focused, and as tenants usually hold less bargaining power when negotiating with a landlord, and accordingly QCAT may look more favourably on a tenant. With this in mind, it is crucial that any and all discussions with tenants (or landlords, as the case may be) are conducted in good faith and for the best interest in the parties. While a landlord pushing for rent or a tenant burying their head in the sand might result in a short reprieve now, it may not be worth it 6 months down the track if compensation is payable.
It is important to ensure that all discussions between a landlord and a tenant are open, honest, and in good faith – not only to avoid problems down the track but to actually assist both parties in pulling through the COVID-19 pandemic and continuing their relationship and businesses in the future.
Should you be experiencing issues with a landlord or tenant and need a fast, friendly, and knowledgeable hand to assist, contact our office today.