The following document outlines the important changes for Landlords and Tenants following recent legislation.
Extension of Moratorium Period for Queensland Leases
On 18 September 2020, the Queensland Government issued a brief announcement that the moratorium on evictions for commercial and retail tenancies was to be extended until 31 December 2020.
Previously the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 provided various protections to tenants of retail and commercial leases during the ‘Response Period’ (29 March 2020 to 30 September 2020).
Last night (29 September 2020), the Queensland Government released the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Amendment Regulation 2020 (Updated Regulation).
The Updated Regulation does not extend the Response Period, but instead provides some protections to tenants for the ‘Extension Period’ (1 October 2020 to 31 December 2020).
The protections given to tenants during the Extension Period are similar, but not identical to the protections previously provided to tenants during the Response Period.
Summary of Changes
The principal changes effected by the Updated Regulation are:
A. New Jobkeeper Eligibility Test
During the Extension Period, a tenant will need to provide fresh evidence of eligibility for Jobkeeper Scheme for the period 28 September 2020 to 4 January 2021 under the new Jobkeeper guidelines.
Due to changes to the Jobkeeper rules, it is likely that many tenants which may have been eligible for Jobkeeper previously, may have lost that eligibility and therefore will not retain the benefit of protections during the Extension Period. Protections given to tenants in the Extension Period, apply only to tenants that qualify for that protection under this new test.
The other eligibility requirements remain unchanged, being:
- the tenant is an SME (i.e. turnover less than $50 million); and
- the lease (or AFL) was binding on the parties prior to 28 May 2020.
B. Waiver of Rent no longer mandated
During the Extension Period, the Landlord is not required to offer any form of rent discount as a waiver (whereas during the Response Period, at least 50% of the rent reduction is to be applied as a waiver).
C. Application of Previous Rules to the Extension Period
The balance changes effected by the Updated Regulations have the general effect of continuing the previous regime (applicable during the Response Period) to apply to eligible tenants (who qualify under the new test), during the Extension Period.
If a Landlord and Tenant have already reached agreement on the terms of rent assistance that runs beyond the Response Period and within the Extension Period, then that agreement remains binding on the parties, and does not need to be re-negotiated unless the Tenant’s circumstances change.
If an agreement between the Landlord and Tenant ended on 30 September 2020, then the Updated Regulation will apply to any relief sought by tenants after that date. It is up to tenants to make a fresh application to the landlord for relief in that case.
Updated complete summary
An update of our previous summary of the operation of Regulation as it now applies is set out below.
1. Summary for Landlord
Under the Updated Regulation, in respect of the following periods,
- 29 March 2020 to 30 September 2020 (the Response Period); and
- if eligible, 1 October 2020 to 31 December 2020 (the Extension Period),
- Must not increase the Rent. If a Tenant is eligible for renewed protection during the Extension Period, then any Rent review which would otherwise have occurred during that period, will not have effect until 1 January 2021;
- Must not breach a tenant or terminate a lease in respect of a tenant’s failure to trade or non-payment of rent and outgoings (but in respect of the relevant periods only);
- Must negotiate rent relief with tenants in good faith, if either party initiates negotiations;
- Must offer a tenant rent relief within 30 days of receiving sufficient information from a tenant as part of rent relief negotiations with a tenant.
The Landlord’s offer for rent relief must:
- Provide that at least 50% of rent relief is to be in the form of a waiver (but only so far as it relates to rent relief provided during the Response Period);
- Take into account ‘all circumstances of the tenant’, including the tenant’s financial position (i.e. this is not specific to the Premises, but the Tenant’s whole business);
- Take into account the Landlord’s financial position;
- If the Landlord has received outgoings relief (i.e. land tax reduction), that should be factored into the offer to the tenant;
- Include an offer to extend the Lease term for a period which corresponds to the rent relief period (i.e. to allow for repayment by the tenant of any deferred rent).
Landlord need not offer an extension if:
- it cannot (e.g. because it has agreed to sell the property with vacant possession, has already signed a lease to a new tenant following expiry); or
- it demonstrates it intends to use property for a commercial purpose (i.e. redevelopment).
2. What Rent Relief must a Landlord Offer to a Tenant?
There is no rule for determining how much rent relief should be offered.
The Code provided that rent should be reduced to the same extent as a tenant’s revenue has declined, however, this has not been included in the Regulations.
3. How Long does a Tenant have to Repay Deferred Rent?
Deferred Rent which is agreed to be repaid by a Tenant:
- is to be amortised over at least 2 years, but not more than 3 years;
- no interest or other fee/charge is to apply to the deferred rent, unless the tenant defaults.
If a Tenant was eligible under the Regulation during the Response Period, but is not eligible during the Extension Period, then repayment of deferred rent can be sought from 1 October 2020. A tenant that is eligible under the Updated Regulation during the Extension Period, then Repayment cannot be sought until after the Extension Period (i.e. from 1 January 2021).
Obviously, this time frame is likely to mean that many tenants may be required to repay deferred rent after their lease has expired, as the Landlord’s obligation to offer an extension of the term only applies to the extent of the rent relief period (i.e. up to 6 months).
A landlord is entitled to continue to hold security for the deferred payment following expiry of a Lease. However, we expect that in most cases, the most appropriate security to ensure repayment will be an extension of the term of the Lease to allow for the 2- 3 year repayment period. If negotiating a deferral beyond lease expiry, Landlord’s should check the expiry dates on bank guarantees, and include a requirement to extend those dates (or the date of enforceability of a personal guarantee or security deposit).
4. What leases are affected by the regulation?
Any Lease in Queensland that:
- was binding/entered into before 28 May 2020 (this includes an AFL entered into before 28 May 2020); and is a:
- retail lease (under the Retail Shop Leases Act); or
- a lease to a tenant that operates a business (this includes a charity/not-for-profit); and
- the tenant is an SME (i.e. turnover less than $50 million). This threshold applies at the group level of a Tenant’s business (not the tenant entity on its own). If a tenant is an affiliate of, or connected with, other entities for the purpose of the Income Tax Assessment Act 1997, the aggregate turnover of all of those entities must be $50 million or less; and
- the tenant (or a related party, e.g. a service company of the tenant) is eligible for Jobkeeper. This means the Tenant named in the Lease itself does not need to qualify for Jobkeeper, and so the 30% turnover decrease which is a threshold requirement of Jobkeeper, is considered at a group level, not a tenant level.
Note that a “lease” includes a lease, sub-lease, licence or other agreement granting a right of occupation (e.g. signage agreements, car park licences etc.).
Care needs to be taken in relation to arrangements that might not amount to a lease in the usual sense (for instance a facility management agreement or development agreement) but which might be caught by the Regulation if there is some right to occupy premises involved.
5. What about franchisees?
If the tenant is a franchisor, but there is a franchisee occupying the premises, then the lease will be subject to the regulation (e.g. Retail Food Group is the tenant, but they have a small franchisee operating the business, then the lease will be subject to the Regulation). This differs in other States such as New South Wales.
6. When does the Regulation commence?
The Regulation is effective as law from 28 May 2020.
This means, Landlords must comply with the Regulation from 28 May 2020.
If a Landlord has taken steps under a Lease (i.e. to terminate a lease for non- payment of April 2020 rent) prior to 28 May 2020, then those actions will not retrospectively be taken to be in breach of the Regulation. (However, this does not mean that such action may be taken to have breached the requirements of the Code).
7. When does a Tenant need to comply with its lease?
The Regulation provides relief to Tenants during the ‘Response Period’, which is between 29 March 2020 and 30 September 2020, and then further relief between 1 October 2020 and 31 December 2020 ‘Extension Period’.
If the Regulation applies to a tenant/lease, then during the Response Period (and Extension Period, if applicable), a Landlord cannot take ‘Prescribed Action’. A prescribed action includes:
- termination, eviction or re-entry by Landlord;
- claim for interest, damages;
- seizure of property;
- drawing on or enforcing a security (i.e. bank guarantee, personal guarantee, security deposit); or
- exercising or enforcing any other right of the Landlord.
The restriction on taking a Prescribed Action, only applies if the action is taken by the Landlord in response to:
- the tenant failing to trade from the Premises during the Response Period (or Extension Period, if applicable); or
- failure by the tenant to pay rent or outgoings for a period which falls during the Response Period (or Extension Period, if applicable).
A Landlord can still take prescribed action if:
- a Landlord has made genuine attempts to negotiate a new arrangement with the Tenant, but the tenant substantially fails to negotiate/provide information etc;
- a Tenant was in breach of a lease prior to 29 March 2020, then in most cases, a Landlord can still act on that prior breach.
- If the Tenant’s breach was a failure to pay rent/outgoings for March 2020, then the Landlord cannot take action against the Tenant (assuming the rent/outgoings period includes 29 March onwards). Most retail and commercial leases require rent to be paid each calendar month and those landlords will not be able to breach their tenants for unpaid amounts for the period 1 – 31 March 2020.
- the Tenant and Landlord have reached agreement on a new rent relief arrangement, and the Tenant fails to comply with that arrangement, then the Landlord can take Prescribed Action in response to that breach.
- the Tenant breaches another covenant of a lease (e.g. failure to insure the premises, unlawful use of the Premises etc.), then the Landlord can take prescribed action.
- a Tenant breaches its obligation under an Agreement for Lease (e.g. fails to conduct fitout works etc.), then the Regulation should not prevent the Landlord from taking some forms of action against the Tenant under the AFL.
8. What about Outgoings?
A Landlord is not required to offer a reduction in outgoings payable by a tenant,
- If the Landlord has obtained outgoings relief, an offer to reduce rent payable by the tenant should have regard to the reduction in the Landlord’s outgoings liability;
- The Landlord cannot breach a tenant for failure to pay outgoings; and
- A Landlord may reduce services to premises, to the extent appropriate due to Covid-19 (e.g. reduction in air conditioning if premises are not being occupied etc.). Note that because a Government Tenant does not fall within the scope of the Regulation, it is important that service levels to government tenancies (and any other tenancies not within the scope of the Regulation) are maintained.
9. Can you contract out of the Regulation?
Yes, but you cannot permanently exclude the operation of the Regulation.
- If a Landlord reached an agreement with a Tenant for rent-relief prior to 28 May 2020, then that agreement remains binding on the parties. However if the Tenant’s circumstances change (e.g. their revenue drops more than expected when they reached that agreement), then a Tenant can seek to apply the Regulation.
- Similarly, if a Landlord and Tenant reach agreement after 28 May 2020 on a rent relief, and the Tenant’s circumstances later deteriorate, then the Tenant can seek to apply the Regulation again. However, in this circumstance the requirement to apply 50% of any rent reduction as a waiver is removed (i.e. the Landlord can require that any additional rent reduction is a deferral only, and not a waiver).
10. What if the parties don’t agree?
The Regulation provides for dispute resolution, including mediation processes.
Please contact your PURE Property Management Specialist or your Solicitor if you wish to discuss these important changes. *
* the above information was prepared by Connor O’Meara Solicitors (Level 4, 10 Eagel St, Brisbane 4000). If you would like to speak to them about your situation or need to seek legal advice, you can contact them on 07 3221 3033. Please note that Pure cannot offer legal advice.