On 28 May 2020, the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) (the Queensland Code) was passed. It gives legal effect to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (the National Code) in Queensland.
Who does the Queensland Code apply to? What obligations do landlords have? What if there is a dispute? We answer these important questions below.
What type of leases does the Queensland Code apply to?
It applies to:
- retail shop leases, within the meaning of the Retail Shop Leases Act 1994 (Qld); and
- any lease, sub-lease, licence or other agreement granting rights to another person to occupy premises (other than as a residence) under which the premises are to be wholly or predominantly used for carrying on a business or undertaking of any nature, whether or not for profit, including for the purposes of:
- manufacturing;
- sale of goods;
- supply of services; or
- conduct of trades or professions.
The lease, agreement to lease or other agreement must have been binding on the tenant on 28 May 2020.
Are all tenants entitled to the benefits of the Queensland Code?
No. The Queensland Code only applies to SME tenants whose annual turnover:
- was less than $50 million last financial year (i.e. FY18-19); or
- is likely to be less than $50 million this financial year (i.e. FY19-20).
What turnover is relevant?
All turnover of the tenant’s business is relevant in determining whether the $50 million threshold is met. Turnover includes:
- proceeds of sales of both goods and services;
- income derived from internet sales;
- repair, service, commission, rent, leasing and hiring income;
- government bounties and subsidies;
- interest, royalties and dividends;
- turnover generated in respect of the tenant’s business from locations other than the leased premises; and
- the aggregate turnover of any connected or affiliated entities of the tenant (see further discussion of these concepts below).
JobKeeper payments and any other grant or assistance provided by the Commonwealth, State or local governments to mitigate the effects of the COVID-19 emergency are not to be included.
Are there any other eligibility conditions?
Yes. Either:
- the tenant; or
- an entity responsible for (or involved in) employing staff for the business carried on from the premises that is:
- connected with the tenant (e. controls or is controlled by the tenant or are both controlled by a third party); or
- an affiliate of the tenant (e. acts, or could reasonably be expected to act, in accordance with the tenant’s directions or wishes in relation to the affairs of the business),
must be eligible for the JobKeeper scheme by virtue of the fact that:
- it carried on business in Australia (or was a non-profit body) on 1 March 2020; and
- the business has faced a 30% drop in turnover.
What about franchise arrangements?
If the Queensland Code applies to a franchisee’s sublease with its franchisor (or its leasing entity), then the Queensland Code will also apply to the lease of the premises between the franchisor (or its leasing entity) and the landlord, irrespective of the franchisor’s turnover or eligibility for JobKeeper.
How far back does the Queensland Code apply?
It retrospectively applies to 29 March 2020.
What rent relief obligations do landlords have if the Queensland Code applies?
Tenants may ask landlords in writing to negotiate the rent payable under (or other conditions of) its lease.
Landlords must negotiate with tenants in accordance with any requests received.
Within 30 days of receiving sufficient information from its tenants (see further discussion of this below), landlords must:
- submit an offer to the tenant that:
- has regard to:
- the reduction in turnover of the business carried on by the tenant at the premises between 29 March 2020 and 30 September 2020;
- the tenant’s financial and other circumstances;
- the extent to which a failure to reduce the rent payable would compromise the tenant’s ability to otherwise comply with its obligations under the lease;
- the landlord’s financial position, including any financial relief provided as part of any COVID-19 response measure (for example, payroll tax relief);
- any reduction in (or waiver of) any amount payable on account of land tax, local government rates, statutory charges, insurance premiums or other outgoings;
- offers a rent reduction that:
- provides for at least 50% of the rent reduction to be in the form of a waiver;
- provides that any deferred rent will be repaid as follows:
- not until after 30 September 2020;
- amortised over at least two years (but not more than three years);
- without any interest charges or other fees being payable, unless the tenant fails to comply with its repayment obligations in respect of the deferred rent; and
- that (notwithstanding what the lease might say) the landlord can continue to hold any security deposit or bank guarantee until such time as the deferred rent is repaid in full; and
- offers to extend the term of the lease equivalent to the period for which rent is waived or deferred on the same terms and conditions as the existing lease, unless the landlord:
- has already agreed to lease the premises to someone else at the end of the term; or
- requires the premises for its own commercial purpose; and
- put forward the landlord’s proposal in respect of any other changes requested by its tenant (to lease conditions other than the payment of money).
If a temporary rent relief agreement is agreed and thereafter a ground on which it was based changes (for example, the tenant’s turnover does not increase as significantly as expected or its income decreases substantially), the tenant can seek a further reduction before 30 September 2020, and the same process will apply.
Similarly, if a tenant’s financial circumstances improve before 30 September 2020, a landlord can seek to renegotiate the agreement. However, there is no obligation on tenants to disclose this.
Another restriction imposed on landlords is that they cannot increase or give effect to any increase in rent (for example, pursuant to a standard rent review clause) until after 30 September 2020 (or seek to backdate thereafter). This does not apply to rent payable by reference to turnover.
What information must tenants provide in support of their request?
As soon as practicable after lodging any rent relief request, tenants must give landlords sufficient information to enable the landlord to properly consider the request – and so that the parties can negotiate in a fair and transparent way.
Examples of sufficient information include:
- a clear statement about the terms of the lease that the tenant is seeking to negotiate;
- a statement by the tenant that demonstrates how the eligibility criteria of the Queensland Code apply, accompanied by supporting information and evidence including:
- accurate financial information or statements about the turnover of the tenant’s business (and the aggregate turnover of any connected or affiliated entities), including:
- a statement about the COVID-19 restrictions imposed on the business that reasonably affected, or will affect, turnover in FY19-20;
- extracts from an accounting system or lodged BAS or tax returns;
- expenses that have substantially increased (or have been deferred, waived or suspended) due to COVID‑19;
- information demonstrating that the tenant’s turnover (including that of any connected or affiliated entity) in FY18‑19 was less than $50 million, or is likely to be less than $50 million in FY19-20;
- evidence that the tenant:
- has sustained at least a 30% drop in turnover when compared to periods before 29 March 2020, including those months immediately preceding and the corresponding periods in the last financial year – and is eligible for the JobKeeper scheme; or
- is participating in the JobKeeper scheme, including:
- results of the ATO JobKeeper turnover test; and
- JobKeeper enrolment information (for example, the receipt from ATO);
- information about any steps the tenant has taken to mitigate the effects of the COVID-19 emergency on the tenant’s business, including details of any assistance received from the Commonwealth, State or local governments; and
- if the tenant is a franchisor:
- information about any concession or benefit provided to or by the franchisor in relation to rent or outgoings for the premises ultimately occupied by the franchisee; and
- an undertaking by the franchisor to pass on any concessions or benefits to the franchisee ultimately occupying the premises.
The information provided by tenants must be true, accurate, correct and not misleading.
Landlords should not be asking for:
- future cash flow projections;
- balance sheets, profit and loss or year to date financials;
- bank balances;
- 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 of the financial information; or
- any onerous documentation requests, especially if they involve paying a fee to produce or access.
Does the lease need to be varied?
No. A simple written agreement between the parties covering the terms of the reduction in rent and any other conditions will be sufficient.
Are landlords required to give revised Lessor Disclosure Statements under the Retail Shop Leases Act 1994 (Qld)?
No. The Queensland Code makes it clear that revised Lessor Disclosure Statements do not need to be given in respect of any agreed temporary rent relief agreements or other lease variations.
What else can’t landlords do if the Queensland Code applies?
If a tenant fails to:
- pay rent or outgoings for a period occurring wholly or partly between 29 March 2020 and 30 September 2020; or
- open for trade during the normal trading hours required under its lease between 29 March 2020 and 30 September 2020,
landlords are not entitled to take action or start any proceeding on this basis to:
- recover possession of the premises;
- terminate the lease;
- evict the tenant;
- exercise any right of re-entry to the premises;
- seize any property, including for the purpose of securing payment of rent;
- forfeit the lease;
- seek damages;
- claim payment of any interest, fee or charge on unpaid rent or outgoings;
- claim on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings;
- claim under a guarantee; or
- exercise or enforce any other right of the landlord under the lease.
These are known as the ‘prescribed actions’.
What if COVID-19 isn’t the reason?
Landlords can still take ’prescribed actions’ if the breach of the lease by the tenant does not relate to the effects of the COVID-19 emergency – for example, breaches arising due to tenants:
- being in arrears for periods before 29 March 2020; or
- causing wilful damage to property.
Tenants cannot simply refuse to supply sufficient information. If a tenant substantially fails to comply with its obligations under the Queensland Code, and the landlord has genuinely attempted to negotiate a temporary rent relief agreement, then the landlord is not prevented from taking action to enforce the lease.
How long will the Queensland Code last?
It will expire on 31 December 2020, unless otherwise extended by the Government.
Do landlords have to follow the Queensland Code?
Yes, if the eligibility criteria applies. However, it does not stop landlords and tenants agreeing to enter into agreements inconsistent with it – nor does it affect the validity of such agreements (but if tenants want to re-negotiate terms to reflect the Queensland Code, they still can).
How must the parties act?
Both landlords and tenants must cooperate and act reasonably and in good faith in all discussions and actions regarding mitigating the effect of the COVID-19 emergency.
What if there is a dispute?
The parties must first attempt to resolve the dispute informally between themselves.
If this doesn’t work, a written dispute notice can be given to the newly appointed Queensland Small Business Commissioner (QSBC). The process will then be as follows:
- a mediator will be appointed and a notice of mediation issued (which the parties must attend);
- the cost of the mediator will be paid for by the QSBC;
- lawyers can only represent parties at the mediation if the mediator approves;
- if the parties reach agreement at the mediation, the agreement must be recorded in writing and signed by the parties; and
- if the parties cannot reach agreement, there is scope for the matter to be referred to QCAT.
The Queensland Code also extends this dispute resolution mechanism to small business leases – being those involving a sole trader tenant or one with less than 20 full-time equivalent employees – in circumstances where they don’t quite meet the eligibility criteria (for example, only having a 25% drop in turnover).
What if steps were taken to enforce the lease before 28 May 2020?
If a landlord:
- started a proceeding in relation to the lease – for example, served a Form 7 Notice to Remedy Breach; or
- started or took an action that now constitutes taking a ’prescribed action’,
between 29 March 2020 and 27 May 2020 (and the proceeding/action had not been resolved or finalised by 28 May 2020), the proceeding or action is deemed to be stayed until 30 September 2020 – and cannot be pursued any further until that time.
