Commercial Leasing Update – COVID-19 Emergency Response provisions as at 15 May 2020

The Federal and State Governments’ initiatives aimed at assisting parties to commercial leases during the COVID-19 pandemic have continued to evolve. A brief timeline of Commonwealth and State Government initiatives up to 15 May 2020 is as follows:

• The National Cabinet Mandatory Code of Conduct (for small to medium enterprise commercial leasing) (Commonwealth Code) was published on 7 April 2020.
• The COVID-19 Emergency Response Act 2020(SA) (COVID Response Act) came into operation in South Australia on 9 April 2020.
• The COVID-19 Emergency Response (Commercial Leases) Regulations 2020(SA)(First COVID Response Regulations) came into operation on 16 April 2020.
• The COVID-19 Emergency Response (Further Measures) Amendment Act 2020(SA)(Amendment Act), which amends the COVID Response Act, came into operation on 15 May 2020.
• The COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020(SA) (Second COVID Response Regulations), which revoke and replace the First COVID Response Regulations, also came into operation on 15 May 2020.

This alert updates landlords and tenants on the current consolidated legislative provisions in response to the COVID-19 pandemic that apply to commercial leases on and from 15 May 2020. Unless otherwise indicated, all references below to the “COVID Response Act” refer to the original COVID Response Act as amended as at 15 May 2020.

National Cabinet Mandatory Code of Conduct

The Commonwealth Code is intended to impose a set of good faith leasing principles for application to commercial tenancies where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper Program. The Commonwealth Code was intended to be given effect through relevant State and Territory legislation (or regulation) as appropriate.

Legally the Commonwealth Code is not binding on South Australian landlords and tenants unless and until it is given force by or under legislation (or regulation) in South Australia. There remains no express provision in the COVID Response Act or the Second COVID Response Regulations expressly adopting all of the detail in the Commonwealth Code. However the COVID Response Act and the Second COVID Response Regulations now reference the Commonwealth Code and its key principles in various ways (discussed below).

COVID Response Act and Second COVID Response Regulations

Section 7 of the COVID Response Act allows Regulations to be made on a broad range of matters as necessary to address issues arising in a commercial leasing context as a result of the COVID-19 pandemic. This format provides the State Government with flexibility moving forward and enables it to refine current measures and add further measures (on a whole or industry specific basis) if and when the need arises.

The detail of the legislative response to commercial leasing issues arising from the COVID-19 pandemic is now to be found in the Second COVID Response Regulations. A summary of the key points is set out below.

What commercial leasing arrangements are affected?

The COVID Response Act and Second COVID Response Regulations apply to all “commercial leases” in South Australia except leases under the Pastoral Land Management Conservation Act 1989(SA) and the Crown Land Management Act 2009(SA). The definition of “commercial lease” is broad and will cover many leasing and licensing arrangements, irrespective of whether the Retail and Commercial Leases Act 1995 (SA) does or does not apply and also to other leases and licences for value (even if nominal) for any kind of business operations (both for profit and not-for profit).

The Second COVID Response Regulations apply despite any law or legislation to the contrary and operate to modify any commercial lease to the extent provided for by the Second COVID Response Regulations.

The Second COVID Response Regulations are backdated to 30 March 2020 and apply during the “prescribed period” of 30 March to 30 September 2020.

Do landlords have to negotiate with tenants who request relief due to the COVID-19 pandemic?

There is an obligation on parties to a commercial lease (the landlord and the tenant), any guarantor and any other person with an interest in the lease (for example, a mortgagee) to make a genuine attempt to negotiate in good faith the rent payable under, and other terms of, the commercial lease from 30 March to 30 September having regard to:

• the economic impacts of the COVID-19 pandemic on the parties to the lease;
• the provisions of the COVID Response Act and the Second COVID Response Regulations; and
• the Commonwealth Code.

The Second COVID Response Regulations now expressly provide that regard must be had to the Commonwealth Code when implementing temporary measures to apply to parties to certain commercial leases related to circumstances brought about by the COVID-19 pandemic and provides dispute resolution mechanisms. This was not the case in the First COVID Response Regulations.

What actions is a landlord prohibited from taking?

Where a tenant is an “affected lessee” a landlord cannot:

• take action to take back the premises (including termination, eviction, re-entry and recovery of possession);
• distrain goods, or take action for forfeiture or damages;
• require payment of interest on unpaid rent or outgoings; or
• seek to recover all or part of a security bond or seek to enforce a guarantee;

relating to a failure of the tenant to pay rent or outgoings, or the tenant not operating as required by the lease or licence. It should be noted that non-payment of rent is not protected where the rent has been agreed under mediation or determined by the Court.

A tenant under a commercial lease is an “affected lessee” where the tenant:

• is suffering financial hardship as a result of the COVID-19 pandemic (which is deemed to be met if the lessee is eligible for, or receiving, a JobKeeper payment in respect of the lessee’s business (either in their capacity as a employer or on their own behalf); and
• had a turnover of less than $50 million in the 2018/19 financial year (or other 12 month or lesser period determined by a Court or notified in the Gazette). In this regard, it is made clear that turnover is to include turnover derived from internet sales.

What other tenant protections do the COVID Response Act and Second COVID Response Regulations provide?

• Any act or omission of a tenant required by a law that has been enacted in response to the COVID-19 pandemic is deemed not to constitute a breach of the lease or licence nor provides grounds for termination of the lease or licence by the landlord. It should be noted that this protection is only given for acts or omissions required by law – thus decisions made by tenants that exceed or are in addition to legal requirements are not necessarily protected.
• Where a tenant under a commercial lease is an “affected lessee” a landlord cannot increase the tenant’s rent (except where rent is determined by reference to turnover) or require the tenant to pay or reimburse land tax.
• Landlords are required to pass on to their tenants (in the form of a waiver of rent) benefits they receive via waivers or other relief in respect of a land tax liability.

What rights do a tenant and/or a landlord have if an agreement cannot be reached on a tenant’s request for relief?

Mediation

Parties to a lease or licence have been given rights to apply to the Small Business Commissioner (Commissioner) to mediate certain “relevant disputes” arising out of a commercial lease that relate to the COVID-19 pandemic. A tenant cannot apply for mediation unless that tenant is, or is claiming to be, an “affected lessee”. The Commissioner is required to issue the parties to a mediation with a certificate which identifies where a mediation has failed, where mediation would not be reasonable in the circumstances or where a party refused to participate (at all or in good faith).

The Commissioner has also published a “Fact Sheet: COVID-19 Guidance Note – Commercial Information “Requests” by Commercial Lessors” (issued May 2020) (Fact Sheet). The Fact Sheet is directed at clarifying the Commissioner’s views about the nature of requests for information that a landlord may make of a tenant to consider any requests from that tenant for rent relief. In the Commissioner’s view, the only information that a landlord should be seeking from a tenant is:

• turnover sales information to provide evidence of sales/revenue decline;
• JobKeeper information;
• BAS Statements that provide turnover information; and
• information regarding any business insurance held by the tenant.

The Fact Sheet largely focuses on the rights and concerns of tenants and provides some indication of the approach that the Commissioner may take to disputes that come before it.

Magistrates Court

If mediation is unsuccessful, after the Commissioner has issued a certificate a party to a commercial lease may apply to the Magistrates Court (Court) for resolution of the “relevant dispute”. The Court may make orders that include orders:

• granting rent relief (and, in this regard, any orders for rent relief must consist of at least a 50% waiver - which is consistent with one of the key principles of the Commonwealth Code);
• deferring rental payments for a period of up to 24 months (and associated orders extending the lease as required to give effect to such deferral);
• modifying the terms and conditions of a lease; and
• other orders that the Court thinks necessary or desirable to resolve a dispute between the parties to a commercial lease.

When considering making orders the Court is required to have regard to a range of matters that seek to balance the interests of the parties to the lease including:

• the reduction in the turnover of the business of the tenant during the “prescribed period”;
• any amounts that the landlord has already agreed to waive;
• whether a failure to provide rent relief would compromise the tenant’s ability to fulfil its ongoing obligations under the lease;
• the ability of the landlord to provide rent relief, including taking into account any relief provided to the lessor by a third party (such as a mortgagee); and
• any reduction by a third party to outgoings (for example, any relief from rates or taxes that the tenant has or will have the benefit of).

The Court cannot disturb any agreement that was made between the landlord and tenant since 30 March and which operates between 30 March and 15 May. It appears, however, that the Court could disturb agreements that continue to operate after 15 May.

How long will these measures remain in place?

The COVID Response Act now expressly provides that the commercial leasing provisions in section 7 and all associated Regulations made under them will expire on 30 September 2020 (and as the first measures came into operation on 30 March 2020 this will mean that the measures will be in place for a six (6) month period).

What is not covered or defined by the COVID Response Act and Second COVID Response Regulations?

There are a number of matters that are still not settled by the COVID Response Act and Second COVID Response Regulations (in whole or part) which creates some uncertainty about the manner in which they will operate, and which are summarised below.

• In relation to the definition of “financial hardship”, the Commonwealth Code and the Second COVID Response Regulations link this concept to a reduction in business turnover. However, this does not take into account cases such as:
  • where business turnover has not been affected to a substantial degree but where business expenses have increased significantly because of additional cleaning and operational requirements to address COVID-19 restrictions; and
  • where turnover is seasonal and drop offs in turnover are therefore to be expected during particular periods.

• The COVID Response Act and Second COVID Response Regulations largely focus on the payment of rent and certain outgoings by tenants. It does not expressly address other obligations that tenants have under lease and licence arrangements that may also be a substantial financial burden, such as repair and maintenance obligations. As it stands, breaches of these other obligations do not appear to be expressly protected by the COVID Response Act and Second COVID Response Regulations.
• The COVID Response Act and Second COVID Response Regulations do not address how rental arrears are to be ultimately resolved. While there is a prohibition on termination, rent will presumably continue to accrue (subject to any commercial agreement between the landlord and tenant to the contrary or any order of the Court). The COVID Response Act and Second COVID Response Regulations do not outline if, when and how such arrears will need to be paid.
• The COVID Response Act and Second COVID Response Regulations do not distinguish between gross, semi-gross and non-gross rent. In cases where rent is gross or semi-gross it would seem appropriate to ascertain the portion applicable to the strict “rent” component where rent relief is being considered. However, it is not clear if the Commissioner or Court will take such an approach if the matter comes before them.
• It is likely that when market rent reviews next fall due under commercial leasing arrangements rent may decrease, providing a benefit to the tenant. This fact also does not appear to be specifically contemplated by the COVID Response Act and Second COVID Response Regulations.

While the recent amendments to the COVID Response Act and the introduction of the Second COVID Response Regulations continue the “holding pattern” that has been put in place in relation to commercial leases and strengthen certain tenant protections, there are still a number of matters that remain to be settled. The issues that fall out from this will continue to evolve, particularly as we get closer to the 30 September expiry date, which is also the date by which many mortgage deferral periods will also end. In the meantime, landlords will need to consider all requests received from tenants for relief on a case by case basis and seek assistance where necessary to understand and enforce their rights and obligations.

For more specific information on any of the material contained in this article please contact Michael Ryan on +61 8 8210 1287 or mryan@normans.com.au or Lisa Hubbard on +61 8 8217 1369 or lhubbard@normans.com.au.