As hotels, pubs and clubs across Queensland start to re-open following the government’s announcement to lift certain restrictions, Queenslanders are flocking to enjoy ‘a parmy and a pint’ at their local after more than two months in lockdown. But as more and more publicans welcome happy patrons back to their venues, there is no doubt the hospitality industry will take several months to recover from the effects of the pandemic.
In addition to staffing and employment issues, another major concern for hospitality businesses has been the question of rent relief and resolving lease disputes. An ABS study conducted in March 2020 reported that one in ten Australian hospitality businesses were forced to stop trading altogether during this crisis, leaving many businesses unable to pay rent.
And while several landlords and tenants have already been in discussion regarding deferring or discounting rent across the State, there has been some inconsistency in the processes for raising, investigating and resolving commercial leasing disputes. However, at the end of May, this changed. Here’s what you need to know.
On 28 May 2020, the Queensland Government released the long awaited Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (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 rent relief disputes between parties during the COVID-19 emergency.
What leases does it apply to?
The Regulation applies to an “Affected Lease”, which is basically a lease where:
- the tenant is eligible for the JobKeeper scheme – i.e. has suffered more than a 30% reduction in turnover; and
- the tenant is an SME entity – i.e. 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.
What period does the Regulation cover?
The Regulation applies for a limited “Response Period” between 29 March 2020 and 30 September 2020.
What rights does a tenant have?
A tenant under an Affected Lease can request that its landlord re-negotiate the rent and certain other conditions of its lease for the duration of the Response Period.
What information do the parties have to share?
Once the tenant makes a request to re-negotiate rent, the parties must exchange the following information:
- accurate financial information or statements about the turnover of the tenant’s business.
- information demonstrating that the lessee is an SME entity, having regard to any entities that the lessee 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 effects of COVID-19 on the tenant’s business, including the details of any assistance being received by the tenant from the Commonwealth, State or a local government.
According to Government guidelines:
Information that could be shared by a tenant:
- a statement explaining why the lease is an “Affected Lease”.
- accurate financial information or statements about turnover.
- a statement of COVID-19 restrictions imposed on the business that reasonably affected, or will affect, turnover in 2019–20 financial year.
- extracts from an accounting system or lodged business activity statement (BAS) or tax returns.
- information provided to a financial institution.
- expenses that have substantially increased (or have been deferred, waived or suspended) due to COVID-19.
- results of the ATO Jobkeeper turnover test.
- Jobkeeper enrolment information (e.g. receipt from the ATO)
- information about what steps the tenant has taken to alleviate the financial impact of COVID-19.
- summary of government financial assistance sought and the outcome.
- material provided by a government agency in relation to financial assistance package availability, eligibility or acceptance.
Information that should not be requested:
- future cash flow projections.
- balance sheets, profit and loss or year to date financials.
- the tenant’s bank balance.
- trust account information.
- evidence of refusal or ineligibility for government financial assistance packages.
- financial information to be verified, examined, assured, audited or provided by a third party such as an accountant.
- a letter of comfort or similar from an accountant on the financial information.
- any onerous documentation requests, especially if they involve paying a fee to produce or access.
Landlord’s offer to reduce rent and negotiation
Within 30 days after the parties have exchanged sufficient information, the landlord must make an offer to reduce the rent under the lease and proposed changes to any other lease terms.
The Landlord’s offer must:
- relate to rent payable during the Response Period.
- provide for at least 50% of the rent reduction offered to be a waiver of rent.
- have regard to:
- all the circumstances of the tenant, including any reduction in turnover during the Response Period;
- 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.
Once the offer is received, the parties must cooperate and act reasonably and in good faith in negotiating a reduction in the amount of rent payable for the Response Period.
What happens if tenant and landlord cannot reach agreement on rent reduction?
If the parties are in dispute and cannot reach agreement on the rent reduction, then either party may apply to the Small Business Commissioner for a mediation.
If the dispute is not resolved at mediation, then either party can apply to have the matter determined by the Queensland Civil & Administrative Tribunal.
What happens to rent that is deferred?
Where part of the rent is deferred (rather than waived) then:
- the deferred rent is not repayable until 1 October 2020 (at the earliest).
- the deferred rent is to be repaid over a period of 2-3 years.
- no interest, fees or penalties can be charged on deferred rent.
What if the tenant’s circumstances get worse after an initial agreement is reached?
If the tenant’s financial circumstances change after an agreement is reached, then the tenant is entitled to make a further request for a rent reduction. However, the landlord is not obliged to offer a rent waiver as part of any further negotiation (i.e. any rent relief would only be a rent deferral).
Can a landlord take action where a tenant fails has failed to pay rent?
If a tenant fails to pay rent or outgoings during the Response Period, a landlord is prohibited from taking the following Prescribed Actions in response to those breaches:
- terminating the lease;
- evicting the tenant, exercising a right of re-entry or recovering possession of the premises;
- seizure of any property, including for the purpose of securing payment of rent;
- claiming damages;
- claiming interest on unpaid rent or outgoings;
- claiming on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings;
- claiming on a personal guarantee; and
- enforcing another right by the landlord under the lease.
However, the Regulation does not prohibit a landlord from taking action in respect of any pre COVID-19 breaches. Similarly, if the parties reach agreement on rent relief under the Regulation, and the tenant then breaches that agreement, the landlord make take action in relation to that breach.
WHAT HAPPENS TO ANNUAL RENT REVIEWS THAT FALL DURING THE RESPONSE PERIOD?
The Regulation prohibits a landlord from increasing the rent payable during the Response Period. So if a lease has an annual rent review, the landlord may still review the rent, but any increase cannot take effect until 1 October 2020.
CONCLUSION
The release of the Regulation hopes to offer certainty to parties, by providing a manageable path to achieve outcomes and resolve disputes. We understand that these are challenging times for all parties and whether you are a landlord or a tenant, you can contact us to discuss your position and concerns and options available to you.
