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A State-by-State Guide to COVID-19 Commercial Leasing Regulations

The Mandatory Code of Conduct for Commercial Leases (Code; available here) was announced by the National Cabinet on 7 April 2020, to guide landlords and tenants in dealing with COVID-19 leasing disputes. Since then the various states and territories – with the exception of the Northern Territory – have each introduced their own regulations to implement and enforce the key provisions of the Code within their own borders.

There are some slight differences between the provisions of the Code and the final regulations introduced in each of the States and the ACT. The following is a short guide to help you understand the key elements of the regulations that have been implemented in each jurisdiction.

What period do the regulations cover?

ACT

Prescribed period” from 1 April 2020 until the later of the end of COVID-19 state of emergency that has been declared in the ACT, or until such later day as notified by the Minister.

NSW

Prescribed period” between 24 April 2020 to 24 October 2020.

QLD

Response period” between 29 March 2020 and 30 September 2020.

SA

30 March 2020 to 30 September 2020.

TAS

Financial hardship period” from 1 April 2020 until 30 September 2020.

VIC

29 March 2020 to 29 September 2020.

WA

Emergency period” from 30 March 2020 to 29 September 2020.

What leases are affected?

The Code had stated that it would apply to all tenants with an annual turnover of up to $50 million who are eligible for the Federal Government’s JobKeeper programme (i.e. the tenant must have suffered more than a 30% reduction in turnover).  The regulations that have since been adopted in each of the States and the ACT are generally in line with this principle:

ACT

Applies to most retail and commercial leases entered into before 7 April 2020.  Tenants must be eligible for JobKeeper and have a turnover during the 2018-2019 financial year of under $50 million.  Where the tenant is a member of a corporate group, then the turnover of the group as a whole must be less than $50 million.  Some exclusions apply such as to warehouse operators who do not offer retail services.

NSW

Applies to retail shop leases, plus leases of other premises for commercial purposes, entered into before 24 April 2020.  Tenants must qualify for JobKeeper and have a turnover during the 2018-2019 financial year of under $50 million.

QLD

Applies to retail shop leases and leases of other premises that are used for carrying on a business, where:

  • the tenant or an affiliate of the tenant is eligible for the JobKeeper scheme;
  • the tenant (or group of entities with whom the tenant is affiliated for income tax purposes) had a turnover of less than $50 million for the 2018/19 financial year, or is likely to have a turnover less than $50 million for the 2019/20 financial year.

SA

Applies to retail shop leases and other lease or licence agreements granted to a person for the purposes of carrying on a businesses from the premises, with some exceptions such as pastoral leases.  The tenant must:

  • be eligible for or receiving JobKeeper payments;
  • have a turnover below $50 million (calculated at a group level) during the 2018/19 financial year or during another 12 month period specified by a Court or by the responsible Minister in South Australia.

Unlike other States, the Act applies to all such leases regardless of when they were entered into.

TAS

Applies to commercial leases where the tenant is eligible for the JobKeeper program and has a turnover of less than $50 million per annum.  The tenant does not need to have applied for JobKeeper but their circumstances must mean they are eligible.

VIC

Applies to retail leases and other commercial lease or licence agreements where:

  • the tenant qualifies for and is a participant in the JobKeeper scheme; and
  • the tenant (or prescribed group to which the tenant belongs) has a turnover of under $50 million in either the 2018/19 or 2019/20 financial years.

Does not apply to leases entered into after 29 March 2020.

WA

Applies to retail shop leases and other leases or licences where the tenant or licensee is a “small business” that is owned or operated by an individual, a partnership or a Pty Ltd company and:

  • is personally managed by the owners, partners or company directors;
  • is not a subsidiary of a larger enterprise; and
  • holds only a relatively small share of the market in which it competes.

The tenant must qualify for the JobKeeper scheme and the tenant (or corporate group to which the tenant belongs) must have had a turnover below $50 million in the 2018/19 financial year.

Negotiation of rent relief

Broadly, tenants whose leases are captured by the various State and Territory regulations can ask their landlords to renegotiate the rent and certain other conditions of the lease.  The exact process varies from State to State.

In line with the Code, all States and the ACT require that rent relief should comprise both a waiver of rent (which should amount to at least one half of the total rent relief granted) as well as an interest-free deferral of rent.  The general approach (based on the Code) has been that rent relief should be proportionate to the reduction in the tenant’s turnover, and should relate to rent payable during the period covered by the relevant regulations in the particular State or Territory. 

To explain by way of a practical example, if the tenant’s turnover has decreased to say 40% of 2019 levels, then typically the Code and the regulations will require that:

  • the tenant to continue paying 40% of the usual rent; and
  • for the balance 60% of the usual rent, the landlord is to offer rent relief comprising a rent waiver of one half (ie. 30% total) and a rent deferral of the other half (ie. 30% total) with the deferred component to be repaid by the tenant at a later date, interest free.

It is notable that in Queensland, South Australia and Victoria, the regulations include that other factors aside from the tenant’s turnover should also be taken into account, including the landlord’s financial position and ability to offer rent relief.

On the other hand, Western Australia’s regulations are perhaps the most tenant-friendly in the country.  They provide that rent relief offered by the landlord must be at least proportionate to the reduction in the tenant’s turnover and specifically require that more than 50% of the rent relief offered must be in the form of a waiver if failure to make such an offer would compromise the tenant’s capacity to fulfil the tenant’s ongoing obligations under the lease, and if the landlord has the financial capacity to make such an offer.

Timeframe to repay deferred rent

Landlords’ offers in relation to rent that is “deferred” as above, must include that the deferred rent will be calculated and spread out over equal repayments.  The general position is that the repayments should commence at the end of the period covered by the relevant State regulations as above, and that repayments should be spread out over the greater of two years or the balance of the term of the lease.

There are two exceptions to this rule.  The first exception is in Queensland, where the repayments must be made over a period of at least two years but no more than three years.  The second exception is in South Australia, where Courts can issue orders for deferred rent to be repaid over a period not exceeding 24 months.

Information to be provided

The tenant must provide “sufficient and accurate information” to demonstrate that the tenant is eligible for rent relief under the regulations, as well as financial information to help landlords calculate the rent relief to be granted.  This will include information generated from an accounting system, and information provided to and/or received from the tenant’s banks or lenders.  Otherwise, the regulations are relatively vague as to the specific information that the tenant must provide, and there is no universal set of requirements that can easily be applied to all tenants. 

Instead, information that could be shared by a tenant should be assessed on a case by case basis and might include:

  • a statement of COVID-19 restrictions imposed on the business that reasonably affected, or will affect, turnover in 2019–20 financial year;
  • accurate financial information or statements about turnover;
  • extracts from an accounting system or lodged business activity statement (BAS) or tax returns;
  • JobKeeper enrolment information (e.g. receipt from the ATO or proof of eligibility);
  • summary of government financial assistance sought and the outcome.

What happens to annual rent reviews that fall during the Response Period?

The regulations in NSW, Queensland, SA, Tasmania, Victoria and WA expressly provide that rent payable under a lease covered by the regulations cannot be increased during the relevant period covered by the respective regulations, except to the extent that such increases are calculated by reference to the tenant’s turnover (for example, “percentage rent” or turnover increases that are common in shopping centre leases).  The consequence is that if a rent review were to fall due under a lease in these States, then the landlord is prohibited from enforcing that rent increase during the relevant period.

The ACT regulation does not specifically prohibit such rent increases, but it does require that landlords must enter into good faith negotiations in accordance with the principles in the National Code before the landlord can take certain “prescribed action” such as evicting the tenant or claiming on a security bond.  In turn, principle number 13 of the Code then requires that landlords agree to a freeze on rent increases other than those based on turnover rent.  Therefore, our view is that the ACT regulation would require landlords to offer tenants a freeze on rent increases before the landlord could take “prescribed action”, but otherwise it is arguable that rent reviews do not need to be frozen.

What happens if a tenant breaches their lease, such as by failing to pay rent?

If tenants are in breach of their leases, each State’s regulations set out a list of prohibited actions that landlords are prevented from taking.  The lists vary slightly from State to State but the list in each State includes for example that landlords must not:

  • evict tenants from their premises;
  • terminate the lease;
  • claim on any security bond; or
  • sue tenants for damages (such as unpaid rent);

due to certain breaches of the lease that may occur during the period that the regulations are in effect.

In most cases, landlords are not prevented from taking these prohibited actions for pre COVID-19 breaches, or if the parties negotiate a rent relief agreement between themselves and the tenant subsequently breaches that agreement.  For example, the landlord may be able to claim on a bond if the landlord and the tenant negotiate an agreement to reduce the tenant’s rent in accordance with the regulations and if the tenant then fails to meet their obligations under the negotiated agreement.

What happens if the parties cannot negotiate an agreement between themselves?

Each State provides for the parties to try and resolve the matter through mediation, organised through the following government departments.  There are then different procedures in each State as to how the matter will be finalised if a resolution is not reach through mediation:

ACT

Mediation is facilitated through the ACT Civil and Administrative Tribunal (ACAT): click here for more information.

If the mediation fails, the parties must comply with directions to prepare the case for hearing and determination by an ACAT tribunal.

NSW

Mediation is to be arranged through the NSW Small Business Commissioner: click here to apply.  However, the mediator cannot impose an outcome and the NSW regulations do not provide an express right to have the rent relief dispute determined by a tribunal or court.

Rather, the regulations provide that before a party can take action in a tribunal or court the Small Business Commissioner must first certify that mediation failed to resolve the dispute and give reasons for the failure.  The court or tribunal must then have regard to the leasing principles from the Code when making a decision or order. 

QLD

Mediation can be arranged through the Queensland Small Business Commissioner: click here to complete the enquiry form.

If mediation fails, then the matter can be referred to the Queensland Civil and Administrative Tribunal (QCAT) for determination.

SA

Mediation is facilitated by the Office of the SA Small Business Commissioner: click here to complete the online application form.

If the mediation fails, either party can apply to the Courts for resolution of the dispute.

TAS

Mediation is arranged through the Office of Consumer Building and Occupational Services: click here to apply.

Alternatively, the parties may refer the matter to arbitration if this would be permitted under the Commercial Arbitration Act 2011 (Tas), such as in situations where the lease provides for this.  Notably, parties can take this step whether or not they have first attempted mediation under the Tasmanian regulations.

VIC

Mediation is provided through the Office of the Victorian Small Business Commissioner: click here for more information.

If mediation fails then the parties can apply to finalise the dispute through the Victorian Civil and Administrative Tribunal (VCAT) or the Courts.

WA

Dispute resolution should be attempted in the first instance through the WA Small Business Development Corporation: click here for further information. 

If this fails, then parties can apply to the State Administrative Tribunal (SAT) to determine the dispute.

Conclusion

While there are broad similarities between the Code and the various regulations that have been adopted in each of the States, each set of regulations also has their own idiosyncrasies.  It is also notable that out of necessity, the regulations were passed by the State and ACT parliaments at very short notice and so we expect (and indeed have already seen) a number of teething issues that landlords and tenants will need to confront as they navigate the new laws.

Article written by Matthew Bradford (Partner) and Glen Rolley (Associate).

"The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication."