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Part 1 - Queensland government provides certainty for landlords and tenants: Leasing applicability and negotiation principles

On 28 May 2020, the Queensland Government released the long awaited Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (the Regulation).

The purpose of the Regulation is to give effect to the Commonwealth Government’s National Cabinet Mandatory Code of Conduct and to establish a process for resolving disputes between parties during the COVID-19 emergency.

In keeping with the stated purposes of the Regulation, we have separated this article into two parts, the first of which deals with whether the Regulation applies to your business, sets out prohibited actions of the landlord and the negotiation principles the parties must follow in attempting to reach a negotiated outcome, while the second deals with the dispute resolution process to be followed where the parties cannot reach agreement on relief to be provided despite genuine attempts by both parties to reach agreement.

This article provides detail on the first part of the Regulation – the ‘Applicability and Negotiation Principles’.

Part 2 titled Queensland government provides certainty for landlords and tenants: Dispute resolution processes is relevant to where the parties are in dispute.

In addressing the Applicability and Negotiation principles, we note the following key provisions:

  1. Response Period

The Regulation is transitional, such that it only applies between 29 March 2020 and 30 September 2020.

  1. Leases which are covered

Affected Leases are retail shop leases and leases where premises are to be wholly or predominately used for carrying on a business and where the tenant is an SME and is eligible for the JobKeeper scheme.

An SME is an entity having a turnover likely to be less than $50m for the current financial year, or which had a turnover of less than $50m for the last financial year.

  1. Landlords are prohibited from taking certain action

If the tenant fails to pay rent and/or outgoings or does not open for business during the Response Period, a landlord is prohibited from taking the following Prescribed Action(s) including the starting of a proceeding in a court or tribunal, or for any of the following in relation to the Affected Lease:

  • recovery of possession;
  • termination of the lease;
  • eviction of the tenant;
  • exercising a right of re-entry;
  • seizure of any property, including for the purpose of securing payment of rent;
  • forfeiture;
  • damages;
  • the payment of interest on, or a fee or charge relating to unpaid rent or outgoings;
  • a claim on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings;
  • the performance of an obligation by the tenant or another person under the guarantee under the lease; and
  • exercising or enforcing another right by the landlord under the lease or other agreement relating to the leased premises.

NB: There are certain circumstances where a landlord can take a Prescribed Action but these are limited.

  1. No Rental Increases during Response Period

Other than where a rental increase is calculated by reference to turnover a landlord is prohibited from requiring the tenant to pay increased rent during the Response Period.

A landlord is entitled to apply a scheduled increase however they must not pass that increase onto the tenant until the Response Period ends (i.e. on or after 1 October 2020).

  1. Parties are to act co-operatively

Parties are required to act co-operatively, reasonably and in good faith in all dealings and discussions associated with proposed relief.

  1. Parties are to negotiate

Where a party approaches the other to negotiate the rent and other conditions, the parties must as soon as practicable give each other information relating to the request that is both:

  • true, accurate, correct and not misleading; and
  • sufficient to enable the parties to negotiate in a fair and transparent way.

The Regulation sets out examples regarding what is considered ‘sufficient information’ e.g., financial information, steps taken by tenant to mitigate the effects of the pandemic and other similar, relevant information

  1. Landlord offer

Within 30 days of receiving sufficient information, the Landlord must offer the tenant a reduction in the amount of rent payable and any other proposed changes to the conditions of the lease.

  1. Requirements of Landlords offer

Any offer made by the landlord must:

  • relate to any or all for the rent payable during the Response Period;
  • provide for no less than 50% of the rent reduction offered to be in the form of a waiver of rent; and
  • have regard to:
    • all the circumstances of the tenant, including any reduction in turnover during the Response Period, and the Affected Lease;
    • the extent to which a failure to reduce the rent would compromise the tenant’s ability to comply with the lease;
    • the landlord’s financial position, including any financial relief provided to the landlord as a COVID-19 response measure; and
    • if a portion of the 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.

Interestingly, while a decrease in the tenant’s turnover must be taken into account, the Regulation does not ‘tie’ any rent reduction to that decrease.  Nevertheless, that would still be the most obvious and equitable way to determine the level of rent relief a landlord offers a tenant.

  1. Documentation of agreements

Any agreement reached by the parties can be given effect by entry into a variation of the lease or another agreement.  The disclosure obligations under the Retail Shop Leases Act (RSLA) do not apply to these agreements

  1. Renegotiation of agreements

If an agreement has been reached by the parties, and a ground on which the agreement was based changes in a material way, a party may ask the other to negotiate a further reduction in rent during the Response Period.  However, any further relief need not include waived rent.

If the material change has been positive from the tenant’s perspective, any renegotiation can be for the purposes of reducing the relief initially offered.

  1. Where the parties agree deferred rent

If the parties agree that rent will be deferred, the variation of lease or agreement reached:

  • must not require payment of the deferred rent to be any earlier that the expiration of the Response Period;
  • must require payment of the deferred rent to be amortised, using a method agreed between the parties, over a period of at least two years but no more than three years; and
  • must provide that the landlord not require the tenant to pay interest or any other fee or charge in relation to an amount of deferred rent unless the tenant fails to comply with the conditions on which the rent is deferred.
  1. Security

The landlord may continue to hold any security provided under the lease until the deferred rent is paid, even if that is after the lease has ended, and where it does so, the landlord has the same rights to claim on the security under the conditions of the lease that were in effect immediately before it ended.

  1. Extending the Lease

Where the rent is deferred or waived, the Landlord must offer the tenant an extension to the term of the lease on the same terms and conditions as are existing, except the rent payable must be adjusted for the waiver or deferral. 

The period of the extension is to be commensurate to the period during which the rent is waived or deferred. 

However, the landlord is not obliged to offer the extension if the landlord:

  • is subject to an existing legal obligation that is inconsistent with the obligation to extend the lease; or
  • can demonstrate that the lease cannot be extended because the landlord intends to use the premises for a commercial purpose of the landlord.
  1. Agreements outside of the scope of the Regulation

Nothing in the Regulation:

  • prevents the parties entering into an agreement which is inconsistent with the Regulation; or
  • affects the validity of an agreement that is inconsistent with the Regulation, whether entered into before or after the commencement.

The release of the Regulation hopes to offer certainty to parties, by providing a manageable path to achievable outcomes and a certain dispute resolution process where communications break down. 

We understand that these are certainly challenging times for all parties and confirm our commitment to you that we are here to help.  Whether you are a landlord, a tenant or an asset manager, you can contact us to discuss your position and concerns and options available to you.

Article written by Fiona Sears (Partner) and Sharon O'Toole (Special Counsel).

"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."