Posted 2 September, 2020
By Justin Marschke & Rupert Copeman-Hill
In late March, the National Cabinet determined that short-term intervention was needed to mitigate the effects of COVID-19 on commercial tenants. The National Cabinet Mandatory Code of Conduct (the Code) was published and contains a set of principles governing the relationship between landlords and commercial tenants during the 6 month COVID-19 response period (from 29 March 2020 to 30 September 2020).
On 28 May 2020, the Queensland Government implemented the Code through the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (the Regulation). The Regulation includes various prohibitions on landlords, additional rights for tenants and obligations on landlords and tenants to co-operate and negotiate in good faith.
Under the Regulation, landlords of retail shops or other business premises must give rent and other relief to qualifying SME commercial tenants and must not increase those tenants’ rent during the COVID-19 response period.
The Regulation is very broad. It applies to “affected leases” of business premises (including leases to non-qualifying franchisors but where a qualifying franchisee is in occupation) which were binding on a tenant on 28 May 2020. In addition, the tenant must be eligible for the Government’s JobKeeper Scheme and have a turnover below $50 million.
Benefits for Tenants
Eligible tenants are entitled to a rent reduction. The Regulation does not specify objective criteria to calculate the rent reduction, but landlords must act in good faith and offer an eligible tenant a rent reduction having regard to:
- the circumstances of the tenant such as reduced turnover;
- the extent to which a failure to reduce rent would compromise the tenant’s ability to comply with the lease;
- the landlord’s financial position, including any relief it is receiving under the COVID-19 response measures; and
- any reduction in, or waiver of, land tax, local government rates, statutory charges, insurance premia or other outgoings included in the rent.
After the total amount of the rent reduction is determined, further obligations apply:
- at least 50% of the rent reduction must be a waiver of rent. The landlord cannot recover this amount from the tenant; and
- the balance “deferred” rent must be paid back by the tenant, effectively by way of a loan from the landlord, on the following terms:
- no interest or fees can be charged by the landlord (unless the tenant defaults on repayment);
- repayments must not start until 30 September 2020; and
- repayments must be by way of instalments over at least 2 years, but no more than 3 years.
Restrictions on landlord rights under affected leases
During the response period, landlords are prohibited from taking certain actions under an affected lease including, without limitation, recovery of possession, terminating the lease, eviction of the tenant, forfeiture, exercising a right of re-entry, claiming damages, claiming against security or exercising or enforcing other rights under the lease.
Further, landlords are prohibited from increasing the rent, or giving effect to a rent review, during the 6 month response period.
The recent decision by the NSW Supreme Court in Sneakerboy v Georges Properties Pty Ltd (2020) highlights the approach which courts may take to landlords’ enforcement action against the backdrop of the COVID-19 emergency response legislation. The decision is likely to influence the approach in other Australian jurisdictions. Sneakerboy, as tenant, successfully applied to the Court for relief against forfeiture of its lease. The Court held that Sneakerboy’s history of late rental payments was no bar to relief from forfeiture and its lease was reinstated, even though the landlord then became subject to the relatively onerous COVID-19 rent relief regime which was not in force on the date when it evicted Sneakerboy. Landlords should be cautious in their approach and seek legal advice before taking any potentially prohibited steps under their leases.
Where rent is waived or deferred under a lease, the landlord must also offer a tenant an extension of the lease term equal to the period during which the rent is waived or deferred.
The Regulation provides some protection for landlords:
- a tenant must disclose sufficient information (eg. accurate financial information about its turnover and the steps it has taken to mitigate the effects of COVID-19 on its business) to enable the landlord to negotiate the rent reduction (and any other relief) in a fair and transparent way; and
- if any deferred rent will be payable after the end of the lease, a landlord may continue to hold a security deposit until the deferred rent is paid.
Federal Government’s SME Lending Guarantee Scheme
The Federal Government has recently announced that it will extend its lending guarantee package to SMEs under the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Act 2020. The scheme may be beneficial for non-ADI financiers and their clients.
Phase two of the scheme will run from 1 October 2020 until 30 June 2021, with some changes to phase one. The new rules are:
- loans can be made to SMEs, including sole traders, with a turnover of up to $50 million;
- loans can be utilised for a broader range of business purposes, including to support investment in a period of economic recovery;
- a maximum of $1million per borrower;
- loan terms up to 5 years, but the 6 month repayment holiday may now only be given at the discretion of the lender; and
- loans are unsecured or secured (but any security excludes commercial or residential property)
More details on phase two will be available soon.
In addition, the Federal Government’s $250 million COVID-19 Creative Economy Support Package includes a $90 million Show Starter Loans Scheme. These loans will be delivered as part of the SME Guarantee Scheme, with the Government guaranteeing 100 per cent of loan amounts. This will support concessional loans to assist creative economy businesses to fund new productions and events, to be delivered through commercial lenders and supported by terms and conditions tailored to the arts and entertainment sector.
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Note: This document contains only a general summary of the legal principles relevant to its subject matter and is not intended to be used or relied upon as legal advice. The application of the legal principles discussed may vary depending upon the particular circumstances. Cowen Schwarz Marschke Solicitors take no responsibility for any loss suffered as a result of a person relying on this paper.