1 June 2020

Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020

Bill Purcell
Bill Purcell Property Lawyer

On 3 April 2020, the National Cabinet, which consists of the Prime Minister of Australia and all state and territory premiers and chief ministers, agreed to a document called National Cabinet mandatory code of conduct – SME commercial leasing principles during COVID-19. In this article, that document is referred to as the National Code.

On 28 May 2020, the Queensland Government made a regulation under the Covid-19 Emergency Response Act 2020 (Qld) and the Retail Shop Leases Act 1994 (Qld), principally for the purposes of –

  • lessening the effect of a COVID-19 emergency on landlords and tenants who are parties to particular categories of small to medium business leases by giving effect to the good faith leasing principles in the National Code.
  • establishing a process for resolving disputes between landlords and tenants under those types of leases.

The regulation is called the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020.

The regulation will apply until the end of what is described as the response period.

The response period is a period which will commence on 29 March 2020 and end on 30 September 2020.

This article is intended as a summary of the regulation with the exception of its provisions which relate to dispute resolution. Those provisions will be summarised in a later article.

The article uses the more common expressions of landlord and tenant instead of the technical words lessor and lessee which is used in the regulation.

The regulation is not without complexity and, occasionally, this article will attempt to explain a provision by reference to an example.

Affected leases

Except for certain leases for farming businesses and certain leases, subleases, permits and licenses under the Land Act 1994 (Qld), the regulation creates laws for –

  • retail shop leases; and
  • other leases of premises which are used (wholly or predominantly) for the carrying on a business (prescribed leases)

where–

  • the lease (or agreement for lease) is binding on the tenant when the regulation commenced (i.e., 28 May 2020); and
  • the tenant is what is known as a SME entity; and
  • the tenant (or another person which is connected with or an affiliate of the tenant employs staff for the business at the premises, which would include a tenant’s service company or the trustee of its service trust) is eligible to participate in the JobKeeper scheme, or
  • the lease is a head lease to a franchisor (or a leasing entity which is connected with or an affiliate of the franchisor – see Example 1) and the premises are sublet to its franchisee.

Example 1 – It is common, in the case of large franchises, for the franchisor to take its leases through a corporate entity which is separate to the entity which is the franchisor, and which owns the goodwill and other assets of the franchise business and sublet the premises to a franchisee.


The regulation describes those types of leases as affected leases.

In the regulation, a reference to a small business means

  • a business carried on by a sole trader; or
  • a business employing fewer than 20 full-time, or full-time equivalent, employees.

In the regulation, the expressions affiliate and connected with are taken to have the meanings given to them by the Income Tax Assessment Act 1997 (Cth).

Turnover and SME entities

If the tenant is connected with or an affiliate of another entity, the aggregate annual turnover of the entities will be treated as the annual turnover of the tenant for the purposes of determining whether the tenant is an SME entity or not – see Example 2.


Example 2 – The tenant is a member of a group of companies which has an annual turnover of $90 million. The annual turnover of the business at the premises is $2 million. The annual turnover of the tenant is regarded as $90 million.


In any other case, the regulation will regard the tenant’s annual turnover to be the turnover the business carried on by the tenant at the premises – see Example 3 and 4.


Example 3 – The tenant is a sole trader and runs its business out of one set of leased premises. The tenant’s annual turnover from the business at the premises is $175,000. That amount is the tenant’s annual turnover.


Example 4 – The tenant is a sole trader and runs its business out of two sets of leased premises (Shop A and Shop B) from the same landlord. The annual turnover from Shop A is $50,000 and from Shop B is $90,000. The tenant’s annual turnover for Shop A or Shop B will not be the aggregate annual turnover of Shops A and B. The position would be the same if each shop has a different landlord.


Not-for-profits

The regulation regards not-for-profit operations or activities undertaken by a tenant to be a business.

Action by landlords restrained – after 27 May 2020

With certain exceptions (see below), the regulation makes it unlawful for a landlord to take action (known as prescribed action) against a tenant under an affected lease in respect of

  • failure to pay rent for a period occurring (wholly or partially) during the response period;
  • failure to pay outgoings for a period occurring (wholly or partially) during the response period;
  • the business carried on at the premises not being open for business during the response period according to the terms of the lease.

A tenant under an affected lease has the right to apply to QCAT or a court to restrain a landlord which takes restricted action in breach of the regulation.

Upon hearing an application of that kind, QCAT or a court may award costs against the party in the proceeding.

In the typical franchise arrangement, that is, where the franchisor takes a lease of premises and sublets the premises to its franchisee, the application may be made by the franchisor and the franchisee (jointly) against the head lessor.

If in that type of franchising arrangement, the franchisee makes an application in respect of action taken by the franchisor, the franchisor may apply to have the head lessor joined in the matter.

The category of prescribed action under a lease is very broad and includes –

  • an action relating to the leased premises; or
  • starting a proceeding in a court or tribunal

for any of the following purposes –

  • recovery of possession of premises;
  • termination of the lease (except with the tenant’s agreement);
  • eviction of the tenant;
  • re-entry of premises;
  • seizure of property;
  • forfeiture;
  • damages;
  • interest or other charges on arrears of rent or outgoings;
  • enforcement of a bank guarantee, indemnity or security deposit for arrears of rent or outgoings;
  • exercising or enforcing any other right by the landlord under the lease – see Example 5.

Example 5 – a landlord must not sue for rent payable during the response period under an affected lease.


If a landlord takes a prescribed action in contravention of the regulation, a court or tribunal may award costs against the landlord in any proceedings brought before the court or tribunal in relation to the action taken.

But a landlord is not prevented from taking a prescribed action if –

  • the landlord and the tenant, as a consequence of renegotiations under the regulation, agree to vary the conditions of an affected lease by
    • reducing the rent for the response period; or
    • providing conditions which relate to the reduction an

 the action is in accordance with the agreement; or

  • an agreement between the landlord and the tenant is entered into about –
    • failure to pay rent for a period occurring (wholly or partially) during the response period;
    • failure to pay outgoings for a period occurring (wholly or partially) during the response period;
    • the business carried on at the premises not being open for business during the response period according to the terms of the lease and

the action is in accordance with the agreement; or

  • a court or tribunal so permits; or
  • the tenant has substantially failed to comply with the tenant’s obligations to cooperate et cetera (see below) in compulsory negotiation in circumstances where the landlord has genuinely attempted to renegotiate rent payable or other lease conditions; or
  • there exists a ground for taking action which is not related to the effects of the COVID-19 emergencysee Example 6.

Example 6 – the tenant uses the premises other than as permitted by the lease; the tenant uses the premises for a purpose in breach of the Planning Act 2016 (Qld) or the Liquor Act 1992 (Qld); the tenant fails to take out insurance required by the lease.


Duty to cooperate

The landlord and the tenant under an affected lease must

  • cooperate;
  • act reasonably; and
  • act in good faith

in all discussions and actions which are associated with –

  • lessening the effect of the COVID-19 emergency; and
  • other matters such as –
  • renegotiating rent;
  • renegotiating conditions of the lease
  • exchanging information relevant to those negotiations
  • extending the term of the lease
  • reducing services at the premises.

Rent increases

A landlord under affected leases may review rent in accordance with the terms of the lease during the response period, but must not apply the increased rent during the response period (i.e. before 1 October 2020) unless the rent is based on turnover – see Example 7.


Example 7– The lease provides for annual increases calculated at 3% on 1 July in each year. The monthly rent for year ending 30 June 2020 is $20,000. The landlord may apply the calculation, in which event the monthly increase will be $600. The landlord cannot charge the monthly increase for any month before October 2020 but may charge the increase at the rate of $600 per month from October onwards.


After the response period (i.e., after 30 September 2020), a landlord may not take any action of the kind which is described above as prescribed action over failure to pay the amount of any increase which would otherwise have been chargeable during the response period.

 Compulsory negotiation

Either party under an affected lease may request the other party to renegotiate –

  • the rent payable under the lease; and.
  • other terms of the lease.

The request must be in writing.

As soon as practicable after the request to negotiate has been made, the landlord and the tenant must give each other information which is relevant to the request.

That supporting information must be –

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

The regulation provides a number of examples of sufficient information and those examples are reproduced in the Appendix to this article.

Negotiation is compulsory once the supporting information has been given.

Landlord’s offer

When the supporting information has been given, the landlord must give the tenant–

  • if a rent reduction had been requested or proposed – an offer to reduce the rent payable under the lease;
  • if changes to the lease conditions have been requested or proposed – an offer in relation to those conditions see Example 8.

Example 8 – Changing a condition which requires rent to be paid in advance to a condition which permits rent to be paid in arrears; changing a condition which restricts trading hours.


The landlord’s offer must be made within 30 days.

In making the offer, the landlord must have regard to all the circumstances of –

  • the tenant; and
  • the affected lease.

The landlord’s offer must –

  • be for any or all of the rent which would be payable under the affected lease during the response period; and
  • agree to waive at least 50% of the amount of the rent reduction offered – see Example 9.

Example 9 

The rent is $20,000 per month. The landlord offers to reduce the monthly rent payable by $4000. The offer must provide for at least $2000 per month to be waived (written off). In that case, there should be an offer to defer payment of the other $2000

The rent is $20,000 per month. The landlord offers to reduce the monthly rent payable by $15,000. The offer provides for $10,000 per month to be waived. In that case, there should be an offer to defer $5000.

The rent is $20,000 per month. The landlord offers to waive the monthly rent. In that case, there is no need to offer a deferral.


Also, the landlord’s offer must have regard to the following matters –

  • reduction of turnover of the business carried on at the leased premises during the response period;
  • the extent to which a failure to reduce rent would affect the tenant’s ability to pay rent and comply with its other obligations under the lease;
  • the landlord’s financial position which must take into account any financial relief provided to the landlord as a COVID-19 response measure;
  • any reduction or waiver of any outgoings in the case of a lease under which those outgoings are included in rent or are otherwise payable by the tenant (e.g. a State government land tax rebate; waived local government charges).

When the tenant receives a landlord’s offer, the landlord and the tenant must cooperate and act reasonably and in good faith in negotiating –

  • a rent reduction for the response period; and
  • any conditions relating to the reduction in rent.

If those matters are agreed, they may be recorded by –

  • a variation of the lease; or
  • another type of agreement between the landlord and the tenant.

Further rent negotiations

If –

  • a rent reduction has previously been agreed; and
  • the grounds upon which the agreement was based change, materially, during the response period

either party to the lease may ask the other party to negotiate a further rent reduction during the response period see Example 10.


Example 10 – A rent reduction of $10,000 per month based on the assumption that the business would stay open with an anticipated monthly turnover of $100,000. Two months later trading is so bad that the tenant closes the premises and only trades online with a heavy reduction in turnover. The grounds have changed materially.


The rules which apply to initial negotiations (see above) will apply to further negotiations except that a landlord will not be obliged to offer to further waive any part of a further rent reduction.

Deferred rent

If the process referred to above is applied and agreement is reached to defer payment of rent, the variation of lease or other form of agreement between the landlord and tenant must –

  • not require payment of the deferred rent to commence until the day after the response period ends (in other words, not before 1 October 2020); and
  • require payment of the deferred rent to be amortised over period of at least 2 years and not more than 3 years; and
  • provide that the landlord must not apply any provision of the lease which would otherwise permit the payment of interest or other charges on the deferred rent.

But it should be noted that the landlord will be entitled to charge interest or impose other charges under the lease if the tenant does not comply with the conditions upon which rent is deferred.

Lease extension

If the parties agree that rent is to be waived or deferred, under the process referred to above –

  • the landlord must offer the tenant an extension of the lease term on the same terms and conditions as those which are contained in the lease; and
  • the rent payable during the term of the extension must be adjusted to take into account the amount of rent waived or deferred; and
  • the extension offered must be for a period equal to the period of the waiver or deferral.

It should be noted that, because of the way in which the regulation operates, the period for which rent is deferred could fall within the term of the extension – see Example 11.


Example 11 

Original lease term – Start date – 01/09/2019 – End date –31/08/2022
Rent 1st year $240,000; Rent 2nd year $252,000; Rent 3rd year $264,000
Agreed reduction – $48,000
Amount waived – $24,000 – Amount deferred – $24,000 ($666,66 pm)
Deferral period –Start date – 01/07/2020 – End date – 30/06/2023
Extended lease term – Start date – 01/09/2022 –End date – 31 August 2025
Rent (01/09/2022 – 30/06/2023) – defer $666.66 per month
Rent (01/07/2023 to 31/08/2025 – no deferrals


But. the landlord will not be obliged to offer the tenant an extension –

  • to the extent that the landlord is under an inconsistent legal obligation to a third party – see Example 12; or
  • If the landlord demonstrates that it intends to use the premises for its own commercial purpose.

Example 12 – On 1 February 2020, the tenant informs the landlord that the tenant does not intend to exercise its option to renew the lease when it expires on 30 June 2020. Relying upon that, the landlord enters into an agreement to lease the premises to third party for a term commencing on 1 July 2020. The landlord thereby assumes an inconsistent legal obligation to a third party.


Security deposits

Even if an affected lease requires the landlord to return a security deposit at the end of the lease term, the landlord-

  • may hold the security deposit until all deferred rent has been paid; and
  • must hold the security deposit under the conditions of the lease which applied immediately before the lease ended; and
  • may claim against the security deposit in accordance with those conditions when the response period

Services reduction

If a tenant under an affected lease is unable to operate its business at the leased premises during any part of the response period because of the COVID-19 emergency the landlord may stop or reduce any service at the premises –

But, the stopping or reduction of services must –

  • not be more than reasonable in the circumstances (e.g. cancelling cleaning services to the premises if they are closed might not be unreasonable); and
  • be subject to any reasonable request by the tenant for the maintenance of services (e.g. a request by a tenant of a bottle shop which has been forced to close by COVID-19 to maintain a refrigeration power could be reasonable).

Confidentiality

During the course of a dispute, under the regulation, in relation to an affected lease or a small business tenancy, landlords and tenants are likely to exchange or receive confidential information and, with five exceptions, the regulation requires them not to disclose that information.

For the purposes of the regulation, confidential information is categorised as personal information and protected information.

Personal information simply means the name, address and contact details of an individual other than the landlord or the tenant.

Protected information means –

  • personal information; or
  • other information which relates to –
  • business processes;
  • financial information;
  • information about the trade of the business.

A landlord or a tenant under an affected lease or a small business lease will commit an offence under the regulation if it discloses protected information obtained by it under the regulation unless –

  • the person to whom the information relates consents to its disclosure;
  • the information is given to a professional adviser or financiers who agrees to keep it confidential;
  • the information is in the public domain;
  • the small business commissioner authorises its disclosure;
  • its disclosure is permitted by law.

The maximum penalty for an offence of the kind described is 60 penalty points ($8,007.00)

Dispute resolution

Part 3 of the regulation establishes provisions for resolving –

  • small business tenancy disputes; and
  • disputes about affected leases.

The dispute resolution provisions will be explained in a later article. But, in the meantime, the following comments may be worth noting.

The regulation makes provision for disputes concerning retail shop leases to be resolved under the regulation – instead of under the Retail Shop Leases Act 1994 (RSLA).

However, if before the commencement of the regulation on 28 May 2020, –

  • the dispute resolution provisions under the RSLA have been instigated by a landlord or a tenant in relation to a retail shop lease; and
  • the dispute relates to an affected lease or a small business tenancy; and
  • the dispute has not been resolved or withdrawn under RSLA

that Act (not the regulation) will continue to apply to the dispute.

If an affected lease or a small business lease

  • contains provisions for the resolution of disputes between the parties to the lease; and
  • whether or not those provisions have been complied with

the provisions do not prevent a landlord or the tenant under the lease from starting a mediation under Part 3.

On the other hand, the regulation does not prevent the parties to an eligible lease dispute undertaking a dispute resolution process outside of Part 3.

Suspension of earlier dispute proceedings

Until the response period ends on 30 September 2020, certain lease dispute proceedings or other action started or taken by a party to a lease during the period which started on 29 March 2020 and which ended at midnight on 27 May 2020 without being resolved, completed or finalised before 28 May 2020 will be stopped until the response period ends.

Exemptions given to tenants

Part 4 of the regulation uses the expression COVID-19 response measure for the purposes of–

  • identifying obligations under retail shop leases, prescribed leases and other small business leases; and
  • excusing tenants from complying with those obligations if they are required not to be performed because of –
    • a COVID-19 response measure; or
    • a law of the Commonwealth or another State in response to the COVID-19 emergency.

In broad terms, a COVID-19 response measure is a measure taken under an Act of the Queensland Parliament to minimise serious risks to health and safety caused by, or to assist in responding to, the COVID-19 emergency. State legislated closure of gymnasiums is an example of the type of measure.

If a tenant fails to comply with that type of obligation, the failure will not –

  • amount to a breach of the lease; or
  • constitute a ground for terminating the lease or taking prescribed action against the tenant.

Conclusion

It has taken almost two months for the Queensland government to make this regulation and, as a consequence of the delay Queensland landlords and their tenants and their respective legal advisers have been left to guess or rely upon the rumour mill about how the National Code will be implemented in Queensland.

During that period, tenants claiming to rely upon the National Code, which until now has not been enforceable in Queensland, have stopped paying rent or outgoings, reduced rent or outgoings payments or have sought to have rent reduced. It appears that in some cases tenants’ endeavours have been borne out of a genuine need for rent relief. In other cases, tenants who would not be entitled to rent relief, under the belated Queensland regulation, have conducted themselves, unfairly, in ways which have been detrimental to landlords.  On the other hand, in some cases, there has been conduct on the part of landlords which has been unfair to tenants.

Queensland is, by far, the last government (State or Territory) in Australia to regulate the implementation of the National Code.

Please contact Bill Purcell to discuss your situation and options.

 

Appendix

Examples of sufficient information –

  • A clear statement about the terms of the lease the initiator this is seeking to negotiate.
  • A statement by the tenant that demonstrates why the lease is an affected lease, accompanied by supporting information and evidence including –
  • accurate financial information or statements about the turnover of the tenant’s business;
  • information demonstrating that the tenant is an SME entity under section 5 of the regulation, having regard to any entities that the tenant is connected with, or an affiliate of;
  • evidence of the tenant’s eligibility for, or participation in, the JobKeeper scheme;
  • information about any steps the tenant has taken to mitigate the effect of the COVID-19 emergency on the tenant’s business, including details of any assistance being received by the tenant from the Commonwealth, State or local government;
  • in relation to a franchisor – information about any concession or benefit provided to or by the franchisor in relation to rent or outgoings for the premises occupied by the franchisee, and any undertakings to pass those concessions or benefits to the franchisee.

 


Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

Related Posts

16 June 2020 Uncategorised

Changes to Dealings With Survey Plans & the Introduction of eLodgement of Survey Plans

Find out more
10 June 2020 Publications

Managing Director and Shareholder Disputes in Small Companies Guide

Find out more
22 May 2020 COVID-19 / Publications

New Rules for Signing Deeds and Other Documents due to COVID-19

Find out more
>
>
>
>
>
>
>
>

Stay in the know

Get our latest news and publications delivered straight to your inbox

  • This field is for validation purposes and should be left unchanged.