Nearly two months on from the National Cabinet announcing its mandatory code of conduct for commercial tenancies affected by the COVID-19 crisis, Queensland has finally passed the code into law.
On 28 March, the Queensland Government handed down the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (“the regulation”), which gives legal effect to the guiding principles laid out in the National Cabinet’s code.
The regulation deviates in many key respects from the collaborative aspirations originally outlined by the National Cabinet in the code. Rather than laying out a set of guiding principles to accommodate landlords and tenants devising mutually supportive, bespoke arrangements tailored to their individual circumstances, the regulation functions more as a prescriptive, protectionist piece. That being said, the property industry will no doubt be relieved to have the legal ambiguity of the last two months resolved, and to know at last with certainty where the goalposts lie. Despite its conceptual shortcomings, the regulation does effectively resolve many the contentious issues that have been miring landlords and tenants since the introduction of the code.
As anticipated the regulation will apply to leases of premises used wholly or substantially for the carrying on of a business where:
- the lessee is an SME entity; and
- the lessee is eligible for the JobKeeper scheme.
For affected leases, the regulation prohibits a landlord from:
- terminating a lease;
- evicting a tenant;
- forfeiting a tenant’s security deposit;
- charging penalty interest on arrears; or
- suing for damages,
for arrears of rent or outgoings occurring wholly or partly during the response period (i.e. 29 March 2020 to 30 September 2020.
Critically, the regulation does not prohibit a landlord from exercising rights connected with breaches of the lease:
- occurring before 29 March 2020; or
- unrelated to the payment of rent and outgoings.
This obviously resolves one of the major uncertainties that have been plaguing landlords and tenants over the last couple of months.
Landlords can also enforce rights against a tenant where a tenant fails to negotiate in good faith with the landlord in accordance with the regulation, where the tenant defaults under an agreement for COVID relief, or where a breach is unrelated to the effects of the COVID-19 emergency.
As anticipated, the regulation also freezes any rent increases falling due during the response period. Landlords can still conduct the reviews, but cannot charge or accrue the amount of the increase until the end of the response period.
A tenant must, upon seeking relief, provide their Landlord with sufficient and accurate information concerning their turnover and the effects of COVID on their business. The regulation sets out a detailed description of the information the tenant can be required to provide which, again, resolves one of the major criticisms that has been levelled against the code to date.
A landlord must offer a rental reduction to an affected tenant within 30 days of receiving the tenant’s financial information. That rental reduction must, amongst other things, have regard to all the tenant’s circumstances, including the reduction in the tenant’s turnover. Interestingly, the regulation (unlike the code) does not mandate that the rental reduction must be proportionate to the tenant’s reduction in turnover (just that it has regard to it).
Similarly, the regulation doesn’t specify which periods are to be used for comparison, to assess the tenant’s reduction in turnover. Presumably, the prudent practice will remain to use the same tests for measuring a tenant’s reduction in turnover as those adopted under the JopKeeper scheme. The landlord is allowed have regard to its own financial position in formulating a rental reduction proposal. The landlord must also offer to extend the term of the lease for the period equivalent to the period for which rent is waived or deferred.
At least 50% of the rental reduction must be in the form a rental waiver. Any deferred rental amount cannot then be recovered until after the expiration of the relief period. The landlord may then recover the deferred rent portion over a period of between 2-3 years, regardless of the remaining term of the lease. The landlord may retain the tenant’s security deposit beyond the expiry of the lease, as collateral for the repayment of any deferred rent amount.
If the parties ultimately can’t reach a negotiated relief arrangement between themselves, the regulation provides for a mandatory mediation process, followed by final resolution by QCAT if mediation is unsuccessful.
The big take-aways for the parties are that:
- The code is now law in Queensland. There is no longer any justification for avoiding the issue, or putting off an agreement concerning a rental relief.
- Tenants must provide their financial records to prove hardship.
- Landlords must offer a rental reduction, and they must do so within 30 days of the tenant proving their hardship.
- The parties aren’t locked into a proportionate reduction in rent (although that will probably remain a prudent commercial practice).
- Pre-COVID breaches of the lease are actionable.
If you require assistance navigating the regulation, or negotiating with your landlord or tenant, McCarthy Durie Lawyers can help. We are specialist leasing lawyers and accredited mediators with a broad expertise in all nature of commercial and retail leasing transactions.
We have a suite of quality rent relief and variation documents on hand that can be tailored for your specific circumstances and ready to service Landlords and Tenants alike on an urgent basis.
We can do all of this for a competitive fixed fee.
Call me directly.
Stephen Gibson | Director LLB, BBus, Acc. Spec. (Prop) – Qld
Property | Accredited Specialist
DIRECT +61 7 3479 5217
PHONE +61 7 3370 5100