Queensland Commercial and Retail Shop Leases COVID-19
Emergency Response Regulation
Table of Contents
The Queensland Government recently enacted a new regulation relating to retail shop leases and commercial leases called the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) (the Leasing Regulation).
This article looks at the Leasing Regulation its potential impact upon the terms and conditions of, and disputes regarding, commercial and retail shop leases in Queensland.
The COVID-19 Emergency Response Act
The Leasing Regulation is made under section 23 of the COVID-19 Emergency Response Act 2020 (Qld) (the Act) and section 121 of the Retail Shop Leases Act 1994 (Qld). The Act was passed to protect the health, safety and welfare of those affected by the COVID-19 pandemic including to provide for matters relating to residential, retail and prescribed leases that are affected by this emergency.1 The Act, as well as the Leasing Regulation, are both temporary and are set to expire on 31 December 2020.2
Background to the Leasing Regulation
The main purpose of the Leasing Regulation is to mitigate the effects of the emergency on lessors and lessees by giving effect to the good faith leasing principles set out in the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles (the National Code).
The Leasing Regulation tends to use quite broad language and tries to avoid imposing specific obligations on both lessors and lessees. Instead, it imposes an obligation on parties to affected leases to cooperate with each other and act reasonably and in good faith in relation to their discussions and negotiations regarding mitigating the effects of the COVID-19 emergency.3
Good faith is an implied term in contract law which provides that parties to a contract will deal with each other in a way that will not prevent the other parties from benefiting from the contract. It presumes that each party will engage honestly, fairly and in good faith.
The Leasing Regulation provides significant emphasis on good faith in affected leases in Queensland meaning that a failure to act in good faith may be a breach of contract as well as a breach of the regulation.
Who will the Leasing Regulation affect?
The Leasing Regulation relates to ‘affected leases’ only. For a lease to be considered an affected lease:
- It must be a retail shop lease (entered into pursuant to the Retail Shop Leases Act 1994 (Qld)) or a ‘prescribed lease’;
- The lease must be binding on the parties regardless of whether the lease has commenced;
- The lessee must be an SME entity; and
- The lessee or a connected or affiliated entity employing staff for the business at the premises must be eligible for the JobKeeper scheme.4
The Leasing Regulation defines a prescribed lease as a lease, other than a retail shop lease, under which the premises is wholly or predominantly used for carrying on a business.5 In other words, prescribed leases refer to commercial leases which will also include leases where the lessee is a non-profit organisation carrying on its operations or activities on the premises.6
Small and Medium-sized Enterprises (SME Entities)
Small and Medium-sized Enterprises, also referred to as SME, is defined under section 5 of the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth). Accordingly, SME entities are entities that carry on business or are a non-profit body with:
- An annual turnover that will likely be less than $50 million; or
- An annual turnover during the previous financial year of less than $50 million.7
What changes will the Leasing Regulation bring about?
The Leasing Regulation will affect:
- Rent deferral deals;
- Rights to increase rent;
- Rights to take enforcement action in some cases;
- Some existing enforcement actions (such as by suspension);
- Obligations on re-negotiating payments;
- Lease terms in certain circumstances;
- Dispute resolution for affected leases and small business tenancy disputes; and
- Information entitlements between lessors and lessees.
The Response Period
The Leasing Regulation is temporary and imposes obligations and responsibilities for a period of time referred to as the ‘response period’. The response period commenced at the beginning of 29 March 2020 and ends at the end of the day on 30 September 2020.8
Obligations under the Leasing Regulation
The foremost of obligations imposed on parties to affected leases is the obligation to cooperate and act reasonably and in good faith in discussions and negotiations between the parties regarding the effect of the COVID-19 emergency on their leases. This obligation is broad and is referred to throughout the Leasing Regulation including in terms of dispute resolution.
Under subsection 12(1) of the Leasing Regulation, lessors will no longer be able to take prescribed action (which refers to action such as termination of the lease, rights to re-entry, seeking damages, and charging interest under the lease) where the lessee has:
- Failed to pay rent or outgoings for a period wholly or partly during the response period; or
- Not been open for business on the premises during the hours required under the lease during the response period. 9
However, a lessor will be able to take action against a lessee so long as it is in accordance with:
- A variation that has been made as a result of negotiations entered into between the parties;
- A settlement agreement between the parties relating to the affected lease; or
- An order of a court or tribunal.10
This is also the case if a dispute arises that does not relate to the COVID-19 emergency or otherwise where a lessee has substantially failed to comply with its obligations in relation to negotiations.11
Because of this, it is important that lessors and lessees under affected leases take steps to determine whether they should be entering negotiations to vary the terms of leases pursuant to the Leasing Regulation.
Is your Lessor taking action against you?
If, despite subsection 12(1) of the Leasing Regulation, a lessor takes action against you for failing to pay rent or outgoings, or for failing to keep your business open during the hours required under your lease, you may be able to apply to QCAT or a court with jurisdiction for an order. If you are successful at a hearing, QCAT or the court may make any order it considers appropriate including an order that the lessor comply with its obligation under subsection 12(1) of the Leasing Regulation as well as an order awarding costs.12
Lessors under an affected lease are prohibited from increasing the rent payable by the lessee during the response period. Where there is a rent review during the response period, the lessor is still permitted to review the rent; however, the lessor must not give effect to any increase in rent until the response period ends. This means that rent will not accrue during the response period at all, and the lessor is not entitled to recover that increase in rent at a later date after the end of the response period.13
An exception to this rule may apply where the rent is worked out under the lease in reference to the business’s turnover.
Under the Leasing Regulation, parties will have the opportunity to initiate negotiations with their lessor or lessee in relation to the terms and conditions of the affected lease, including the rent payable.14
Firstly, an ‘initiator’, being either the lessee or lessor, will make a written request to the other party to negotiate rent payable and/or other conditions of the lease. The request should:
- State the terms and conditions of the lease that the initiator seeks to negotiate;
- State why the lease is an affected lease; and
- Enclose supporting information (where applicable) such as:
- Financial information about the turnover of the lessee’s business;
- Financial information of affiliated or connected entities;
- Evidence of eligibility or participation in the JobKeeper scheme; and
- Evidence of steps taken to mitigate the effects of the COVID-19 emergency.
Secondly, both parties must then, as soon as practicable, provide information regarding the request that is:
- True, accurate, correct and not misleading; and
- Sufficient to enable the parties to negotiate fairly and with transparency.
Thirdly, within 30 days after sufficient information has been provided, the lessor must make an offer to the lessee:
- Reducing the amount of rent payable under the lease during the response period; and
- Regarding any other proposed change in the initiator’s request.15
In terms of a reduction in the rent payable, at least 50% of the reduction must be in the form of a waiver.16
For example, if the lessor makes an offer reducing the rent payable by $20,000 during the response period, the lessor must waive at least $10,000 of this amount. The remaining rent must be deferred for payment until after the end of the response period, in which case, the lessor:
- Must arrange for the deferred rent to be paid off over a period of between 2 and 3 years;
- Must not require payment of the deferred rent until after the end of the response period; and
- Must not impose interest or fees on the deferred rent unless the lessee fails to comply with a term of the rent deferral.17
Fourthly, upon the lessor making an offer, both parties must cooperate, and act reasonably and in good faith in negotiating a reduction in rent and change of condition under the lease during the response period.18
Fifthly, upon completion of negotiations, the parties may give effect to the changed terms and conditions by a variation to the lease or entering into another agreement.19
Sixthly, the parties may again enter into negotiations after finalising a variation if the initially anticipated effect is not achieved from the first variation. The regulation provides examples of this which can include where the lessee’s turnover does not increase as significantly as anticipated, or where the lessee’s income decreases substantially.
In this scenario, the parties may initiate and carry on with negotiations in a similar fashion as with the previous steps. The only exception in relation to these subsequent negotiations is that the lessor is no longer obliged to waive at least 50% of any further rent reduced.20
Some of the ambiguities of the Leasing Regulation may arise in terms of how a party can determine whether an offer is compliant. Whilst a lessor is obliged to make an offer reducing rent where the prerequisites are met, the regulation imposes no specific obligations in terms of the extent of the rent reduction.
Rather, the Leasing Regulation again relies on the underlying principle that the parties must deal with each other in good faith. Accordingly, a lessor’s offer must have regard to a series of considerations including:
- All of the circumstances of the lessee and the affected lease in terms of the reduction in turnover of the business carried on in the premises;
- The extent to which failure to reduce rent will affect the lessee’s compliance with the lease including payment of rent;
- The lessor’s financial position including relief received; and
- Reductions in rates, charges, insurance premiums or other outgoings that the rent may normally cover.
Extension of Lease
If the parties do come to an agreement which results in a reduction in rent, the lessor will also be under an obligation to offer the lessee an extension to the term of the lease. The extension must be:
- On the same conditions as the lease except that the rent payable must be adjusted according to the variation negotiated; and
- For a period of time equivalent to the period of rent waiver / deferral.21
However, this obligation will not apply:
- To the extent that the lessor has an existing legal obligation that is inconsistent with the extension; or
- If the lessor demonstrates that the lease cannot be extended because the lessor intends to use the premises for a commercial purpose of the lessor.22
Reduction of Services
The lessor may reduce or cease the services it provides at the premises where reasonable if the lessee is unable to operate at the premises for any part of the response period.23
In circumstances that parties to an affected lease may be required to disclose confidential documents and information, the Leasing Regulation provides that parties to any lease disputes must not disclose the protected information of other parties such as:
- Personal information including names, addresses and contact details; and
- Information relating to business processes, trade and financials.24
Exemptions for Lessees
Exemption from Breach of Lease
Further, the Leasing Regulation provides protection to lessees where they engage in an act or omission that is required under a COVID-19 response measure or law. A lessee is not in breach of a lease, and a lessor does not have grounds to terminate a lease, where a lessee is complying with a requirement under a COVID-19 response measure or law.25
Stay of Proceedings
If a lessor has taken a prescribed action or commenced proceedings against a lessee under an affected lease between the period 29 March 2020 and before the commencement of the regulation on 28 May 2020, those proceedings may be stayed or suspended until the response period ends.26
This will occur if the proceeding or prescribed action:
- Has not been resolved by settlement agreement, order or withdrawal;
- Has not been completed or finalised; and
- Would be in contravention of section 12 of the Leasing Regulation (which relates to the obligation of a lessor not to take prescribed action against a lessee).
In any event, the parties to such a lease dispute are still able to enter into negotiations and resolve their dispute in good faith in accordance with the procedures provided for in the Leasing Regulation.
The obligation of parties to exercise good faith continues in terms of resolving lease disputes. Parties must first attempt to resolve the dispute out of court in good faith. Failing which, the parties will need to attend mediation which can be arranged by the small business commissioner. If this process of mediation additionally fails to result in a resolution, the small business commissioner may then refer the matter to QCAT.
The Leasing Regulation provides powers to QCAT in terms of enforcing settlement agreements and considering the eligibility of lease disputes having regard to the parties’ obligations under the regulation.
 COVID-19 Emergency Response Act 2020 (Qld) s 2.
 Leasing Regulation, s 2 referring to above n i, s 23(6).
 See e.g., Leasing Regulation, s 11.
 Leasing Regulation, s 5(1).
 See above n 4, sch 1 & s 6.
 See above n 4, s 7.
 Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth) s 5.
 See above n 4, sch 1.
 See above n 4, s 9.
 See above n 4, s 12(2).
 See above n 4, s 2(b) & (c).
 See above n 4, s 12(3) & (5).
 See above n 4, s 13(1)-(2).
 See above n 4, s 14(1).
 See above n 4, s 15(1).
 See above n 4, s 15(2)(b).
 See above n 4, s 17.
 See above n 4, s 15(3).
 See above n 4, s 15(4).
 See above n 4, s 16.
 See above n 4, s 18.
 See above n 4, s 18(4).
 See above n 4, s 19.
 See above n 4, s 20.
 See above n 4, s 47.
 See above n 4, s 48(1)-(2).
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