In early April, the Prime Minister announced that the National Cabinet had agreed to a common set of principles, to underpin and govern intervention to aid commercial tenancies. These principles became enshrined into the Mandatory Code of Conduct.
The Code of Conduct imposes the following leasing principles:
- Landlords must not terminate leases due to non-payment of rent;
- Landlords must not draw on security provided by their tenants;
- Tenants must remain committed to the terms of their lease subject to any amendments negotiated in accordance with the Code;
- Landlords must offer tenants proportionate reductions in rent payable by way of waivers or deferrals;
- Rental waivers must constitute no less than 50% of the total reduction in rent payable;
- No fees, interest or other penalties should be applied with respect to rent waived or deferred;
- Any reduction in statutory charges (e.g. land tax and council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the lease;
- A landlord should seek to share with its tenant any benefit received from a loan payment from the Bank or another COVID-19 related initiative;
- The right to recover any expense or outgoing from a tenant by a landlord should be waived;
- Repayments from tenants to landlords should occur over an extended period to avoid undue financial burden;
- Tenants should be provided with an opportunity to extend leases for a period equivalent to the rent waiver and/or deferral period;
- Landlords agree to freeze rent increases for the duration of the COVID-19 pandemic and a reasonable period of recovery; and
- Landlords may not apply any penalties if tenants reduce their opening hours or cease to trade.
Given the fact National Cabinet does not have specific terms of reference, establishment, procedures or powers under Statute or the Constitution, any recommendations and restrictions announced require action from the States and Territories. It therefore became the responsibility of the States and Territories to consider how these principles should be implemented within their jurisdiction.
On Wednesday 8 April 2020, the South Australian Government passed the COVID-19 Emergency Response Bill 2020, allowing the enactment of the COVID-19 Emergency Response Act 2020 (SA), which permits temporary changes to state law in order to cater for and address any issues that may arise as a result of the COVID-19 pandemic.
On 15 May 2020 the COVID-19 Emergency Response (Further Measures) Amendment Act 2020 (the Act) and the COVID-19 Emergency Response (Commercial Leases No. 2) Regulations 2020 (the Regulations), came into effect. Relevantly, the objectives of the Regulations are to “implement temporary measures to apply to parties to certain commercial leases related to circumstances brought about by the COVID-19 pandemic” and “to provide for mechanisms to resolve disputes concerning those leases”.
The Act and Regulations apply to “commercial leases”, which is broadly defined as a “retail shop lease” under the Retail and Commercial Leases Act 1995 (SA); a “lease” under the Landlord and Tenant Act 1936 (SA), or “any other agreement under which a person grants or agrees to grant another person for value a right to occupy premises for carrying on a business”. The term “business” is also broadly defined as an “undertaking (whether or not carried on with a view to profit) involving the manufacture, sale or supply of goods and services”.
The provisions dealing with commercial leases are operable for a prescribed period, having come into operation on 20 March 2020, and at this stage will expire on 30 September 2020.
Affected Persons (Lessees)
The Act and Regulations cover lessors and “affected lessees”. A lessee is an affected lessee if they are suffering financial hardship as a result of the COVID-19 pandemic; and whose annual turnover is less than $50 million. Where a lessee is a franchisee or a corporation, there are additional provisions applicable.
A lessee will be automatically deemed to be suffering from financial hardship, should they be eligible for, or already receiving a JobKeeper payment in respect of the business of the lessee.
Good Faith Obligation
In keeping with the principles enshrined in the Code of Conduct, the Regulations provide that parties to a commercial lease must make a genuine attempt to negotiate in good faith, in relation to the rent payable under the commercial lease during the prescribed period. In doing so, the following must be taken into consideration: the economic impact of COVID-19 on the relevant parties; the provisions of the Act and the Regulations; as well as the principles highlighted within the Code of Conduct.
Prohibitions and Restrictions
Under the Regulations, a number of prohibitions and restrictions are provided for, which are aimed at protecting affected lessees.
During the prescribed period, a lessor is prohibited from taking a number of “prescribed actions” against an affected lessee on the grounds of failure to pay rent and outgoings; or where business hours have reduced or ceased from what is specified in the lease. Any such act or omission will not amount to a breach of a commercial lease. Nor will it constitute grounds for termination of a commercial lease.
These prescribed actions include:
- An eviction of the lessee from the premises the subject of the commercial lease;
- Exercise of re-entry to the premises the subject of the commercial lease;
- Recovery of land;
- Distraint of goods;
- Requiring a payment of interest on unpaid rent otherwise payable by a lessee;
- Recovery of the whole or part of a security bond under the commercial lease;
- Performance of obligations by the lessee or any other person pursuant to a guarantee under the commercial lease;
- Termination of the commercial lease; and
- Any other remedy otherwise available to a lessor against a lessee at common law or under a law of South Australia.
However, prescribed action may be taken against an affected lessee during the prescribed period, in the event the amount payable for rent and outgoings has been negotiated by both parties under mediation, or where the Court has made a determination.MediationIn the event a lessor or lessee cannot reach an agreement on leasing arrangements, the Regulations provide that the matter may be referred to the Small Business Commissioner for the mediation or determination of a “relevant dispute”.
A relevant dispute in relation to a commercial lease includes:
- Whether or not a lessee is suffering financial hardship as a result of COVID-19;
- The provision of rent relief during the prescribed period, including a failure of a party to a lease to take part in negotiation;
- An issue that has occurred in relation to the COVID-19 pandemic, arising from the operation of the Regulations, the commercial lease, or to any other matter relevant to the occupation of the premises, or to a business conducted at the premises the subject of the commercial lease.
While mediation is not defined under the Act or Regulations, the Retail and Commercial Leases Act 1995 (SA) defines mediation to include preliminary assistance in dispute resolution, such as the giving of advice, to ensure the parties to the dispute are fully aware of their rights and obligations; as well as to ensure there is full and open communication between the parties about the dispute. This definition is likely to be most applicable under the Act or Regulations.
Where dispute resolution is unsuccessful, the Commissioner will then issue a certificate stating that the mediation has either been terminated without resolution; that mediation would not be reasonable in the circumstances; or that a party to the commercial lease refused to participate, or did not participate in good faith.
Determination by Court
A party to a commercial lease may apply to the Magistrates Court for a determination of the relevant dispute, so long as the Commissioner has issued the certificate discussed above. The Court can make binding orders for rent relief. If the Magistrates Court makes an order granting rent relief, then at least 50% of the rent relief must be in the form of a waiver of rent.
In determining whether an order granting rent relief to an affected lessee should be made, the Court may have regard to whether a lessee is eligible for, or is receiving a JobKeeper payment, as well as any reduction in turnover of the lessee’s business during a specific period in comparison to another specified period.
It is important to note that the Regulations do not apply to a new lease entered into after 30 March 2020 unless arising through an option to extend an existing lease.
If you have any questions about this article, please contact Botten Levinson Lawyers at 8212 9777.