BREAKING NEWS: New Regulation Just Released
The Queensland Government has released the regulations to accompany the Legislation which was enacted on 23 April 2020 dealing with retail and other commercial leases and the Covid-19 pandemic.
Unfortunately, the entire process has taken some considerable time from when the Prime Minister and the National Cabinet initially announced the mandatory code. Then came the Covid-19 Emergency Response Act 2020 on 23 April 2020 and finally, The Retail Shop Leases and other Commercial Leases (Covid-19 Emergency Response) Regulation 2020 on 28 May 2020.
Finally, the regulation provides certainty and clarity as to many of the details surrounding the relationship between commercial Landlords and Tenants in what has turned out to be one of the most contentious areas for businesses and investors alike during the Covid-19 pandemic.
What are those details:
- To be eligible you must either have a Retail Shop Lease or a Lease of a premises which is wholly or predominantly used for carrying on a business.
- You must be a small to medium enterprise – generally a business with an annual turnover of less than $50,000,000.00.
- The Lessee must be an entity that is responsible for employing staff and is eligible for the Job Keeper Scheme.
In those circumstances the regulations apply, and a Landlord is not entitled to take any of the prescribed actions. Those include, taking recovery of possession, terminating the lease, eviction the Lessee, exercising rights to re-enter the premises, seizure of property, forfeiture, damages, seeking payment of interest or a fee related to unpaid rent, claiming on a Bank Guarantee or security deposit, seeking performance under a Guarantee or exercising a right under the lease relating to the lease premises. These actions are prohibited where a Tenant has failed to pay rent, outgoings or is not open for business during the “response period”.
The “response period” is defined as commencing on 29 March 2020 and ending 30 September 2020. There had previously been some discussion if the legislation would apply retrospectively or would only apply from 23 April 2020.
In circumstances where there is a genuine attempt by a Landlord to negotiate rent, but the Lessee substantially fails to comply with their obligations under the lease or the grounds under which the Landlord takes action are not related to the effects of Covid-19 the Landlord will not be prevented from taking these courses of action.
The parties are required to negotiate rent and other conditions in good faith. The lessee will usually request a reduction in writing from the Landlord to begin those negotiations. This should include true and accurate information to enable the parties to negotiate a fair settlement. This includes provision of accurate financial information or statements about the turnover of the Lessees business.
Within 30 days of receiving such a request the Lessor must offer a reduction in rental in accordance with the regulations, this will include at least 50% of the rental reduction to be in the form of a Rental Waiver.
The reduction in rental and conditions relating to any reduction can be given effect by way of either a Variation of Lease or another agreement between the parties. The regulations provide for a further rent negotiation provision where one party may ask the other to renegotiate if there is a material change of the grounds upon which the agreement between the parties was based.
In relation to any portion of the reduction given by way of deferred rental, that deferred rental will be repayable using a method agreed between the parties over a period of at least 2 years but no longer than 3 years. The Landlord can continue to hold any security deposit until that deferred rental has been repaid.
Specific provision has been made for extending a lease and a Lessor must offer a Tenant an extension (on the same terms and conditions) for the period of the rental waiver or deferral. For example, if a rental waiver or deferral lasted for 6 months then the Landlord must offer to extend the Lease of the Tenant for a period of 6 months on the same terms and conditions, subject to the remaining clauses of the regulations.
As promised, here is the latest update on the evolving situation with Landlord and Tenants on Commercial, Industrial and Retail Premises. The Prime Minister has announced this afternoon that the National Cabinet has met and has made some decisions around this space, which we have all been waiting for.
Most importantly, it has been announced that the National Cabinet have introduced a Mandatory Code which will be legislated in each State. Landlords and Tenants are required to comply with the terms of this Mandatory Code.
The code will require Landlords and Tenants to negotiate in good faith. Landlords aren’t going to be able to terminate a Lease and Tenants are going to have to comply with the remaining terms of the lease.
The Code will apply where the business of either the Landlord or the Tenant has suffered as a result of the Covid-19 Pandemic, so that either business is an eligible business under the governments recently announced Commonwealth JobKeeper program and has a turnover of less than $50 Million.
The parties are then going to have to reach an agreement whereby the proportionate amount of reduction in a Lease rental will apply in cases where the Job Keeper Program already applies to that business. The reference to the Proportionate amount is the amount of reduced turnover of the Business suffered as a result of the Covid-19 Pandemic.
In that circumstance and if those provisions apply, then the rental will be required to be reduced proportionate to the reduction in the business (for example if a business’s turnover has reduced by 50%, that business will see a 50% reduction in the rental for the period of the Pandemic). This rent reduction can be made up of “rental waiver” and “rent deferral”.
In respect of those proportions the “rent free” proportion must make up at least 50% of the rental relief. The “rent deferral” component can be deferred and paid back over a period of not less than 12 months, but usually will be paid back over the remaining term of the lease (for example if the remaining term of the lease is longer than 12 months it would be paid back over the entire term, however if the lease term is shorter than 12 months that tenant will still have 12 months to repay those rent monies).
Rental increases under a lease will be frozen and penalties and interest charges will not be able to be charged, nor can guarantees or bonds be called upon.
These are important changes as the landscape is constantly changing and as things arise further, I will continue to keep you updated. Please remember though any agreements reached between Landlords and Tenants must be documented as the potential disputes in the future will be greater than the problem itself.
We understand that being a Landlord at the moment is an extremely difficult time. We all await further clarification from the Federal Government as to what incentives, if any, will be offered to Commercial Landlords to assist with concessions that may need to be made with their Tenants. Some Australian Banks have announced they will defer loan repayments on loans up to $10 million dollars for Landlords that provide certain assistance to Tenants.
There are a number of incredibly important considerations for a Landlord during this time including maintaining a relationship with Tenants, ensuring that once we emerge from this crisis that your commercial premises have sustainable tenancies and businesses that can hopefully rebound and continue to operate and add value to your properties and the ongoing consideration of ensuring you have sufficient income to meet your financial needs.
With this in mind, a number of Landlords have been receiving approaches from Tenants regarding rental waivers or assistance packages. Given that we cannot be fully aware if any assistance is going to be provided to Commercial Landlords, we see the following as the 3 main options available to our Landlords at this time:
- Provide a “Rental Waiver” – this is a fairly simple process of waiving rental for a specific period of the lease. We would need to be specific as to whether this includes or excludes outgoings;
- Provide a “Rental Reduction” – this is a process where the rental may be reduced depending on the reduced capacity of the Tenant and again should be specific as to whether it includes or excludes outgoings;
- Provide a “Provision of a Rent Moratorium” – this would relate to a specific period where rent is frozen. This means that the rent is not payable under the lease however it is not forgiven or waived by the Landlord. The Landlord could advise that after the Rent Moratorium period the Landlord will reassess the rental during the moratorium period which should allow a Landlord to either require repayment of that rental (say over the period of the remainder of the lease or some other period determined by the Landlord) or alternatively, the Landlord could agree to forgive or reduce that rental at that time;
This last alternative allows the Landlord to defer making a final decision in the reduction or waiver of rental until further information is to hand, including the length of this current crisis and the basis on which each individual is able to recover from the downturn.
We believe the most important element of any of these solutions is that the Landlord properly document any agreement which is reached. No agreement should be reached without proper review and documentation. The reason this remains so vital is that the greatest asset that the Landlord will have is the value of their premises and potentially the ongoing tenancies. If there is dispute at a later point regarding what agreement was reached or the specific terms of that agreement or the ability of the Landlord to later make a determination, each of these may result in substantial dispute and/or
litigation at a future point in time. This has the potential to cause more damage than the current situation if in the instance the Landlord is in a dispute with a large number of its Tenants.
We would recommend that each Tenant is dealt with on a case by case basis and bound to strict confidentiality failing which any agreement may be forfeited.
It may further be prudent that:
- the Landlord negotiate the terms subject to final agreement and documentation to save incurring any unnecessary costs; and
- the costs of documenting by the agreement are either born by the Tenant or potentially on a shared basis between the parties OMB Solicitors will assist with this documentation.
We believe this is an essential time for our Landlords and we look forward to providing you whatever assistance you need during this period.
As you are all aware, we are all anxiously awaiting the announcement of the Government’s rent relief package which is expected as part of the third stimulus package, as a result of the COVID-19 crisis.
We understand that tenants are now coming forward requesting rental relief in the form of reduced rental and/or no rental for a certain period of time due to the economic crises we are currently facing. At present it is too early to know how best to fix the situation until we have a better idea of how long this crisis will last and what other relief will be forthcoming. We do suggest that where assistance is given, it is given on a case by case basis for now.
It is imperative for all Landlords and Tenants to support each other as best they can in this crisis. However, any discussions on rent abatement, short-term agreements to defer some rental and any negotiations be put on hold until we know the full extent of the Government and financial institution relief package which should roll out in the next few days and weeks. Landlords and Tenants will then be able to make an informed decision and enter into negotiations which will benefit both the Landlord and the Tenant for the foreseeable future.
It is important to remember that where the tenants have been in substantial arrears prior to the onset of the COVID-19 pandemic, those rental arrears would not form part of any relief provided but would remain in place.
Further, it is important to note that where an agreement for rental reduction or rental abatement is being offered, you might also consider reaching an agreement with your current tenants to extend the lease term and exercise options early. Any variations to Leases or agreements reached should be documented by way of the appropriate Deeds to safeguard both Landlords and Tenants.
Both Simon and his Commercial/Property Team are here to help guide you step by step through this trying time and we will be sending further emails to you explaining the options and obligations for both Landlords and Tenants once we are in receipt of the full information from the Government in the coming days/weeks.
In the meantime, please do not hesitate to email or phone either Simon or Lisa with any queries or concerns you may have.
On 30 January 2020, the Director General of the World Health Organisation declared the novel coronavirus COVID-19 (“Coronavirus”) outbreak around the world a “public health emergency of international concern”.
We recognise in this difficult time, many of us may be also concerned with our ongoing contractual obligations and how the unforeseeable event of Coronavirus may affect the contracts that we are parties to. In this article, we shall provide insights on what is a force majeure clause and how the Coronavirus may affect contractual obligations.
What is Force Majeure?
Force majeure is a legal concept designed to provide remedies for parties affected by an unavoidable or unforeseeable event. Common examples of force majeure events include earthquake, explosion, natural disaster, terrorism and war.
Eventhough force majeure is a civil law concept, force majeure clauses are used in Australian contracts because of its similarity to the doctrine of frustration in common law. The doctrine of frustration applies when the performance of a contract must be radically different from what was intended by the parties.
Does Force Majeure apply to the Coronavirus outbreak?
The Coronavirus is a recent new global crisis, therefore it is not likely that contracts will include express clauses referring to the event of a Coronavirus outbreak. Whilst in China, the government has issued thousands of Force Majeure Certificates for businesses relying on force majeure clauses in contracts, it is still uncertain whether the Australian government will provide similar provisions. The questions that should be addressed are:
- Is Coronavirus considered a force majeure? This will largely be determined by a particular clause and that specific drafting of the clause.
- What notice is required to be given to enact the force majeure? It is often essential that correct notice be given pursuant to the specific clause.
- What relief can be obtained? Often if the appropriate clause applies, the relief may be temporary for the period of time that the event occurs.
- Is there an obligation on either or both parties to mitigate their loss?
If there is no force majeure can the common law help?
Without new government provisions, the test required in common law is to analyse the risks the parties agreed to take and the precise wording in the contract. In addition, the party relying on the clause will need to prove to the court that the event is beyond the reasonable control of the party seeking relief.
In Australia, frustration may be applicable in the following circumstances:
- A change in law rendering performance illegal. In the current situation, if the law requires the quarantine of a personal service provider, the service provider will be frustrated by such unexpected event as not quarantining and performing personal services to other individuals will be considered illegal.
- Physical destruction of the subject matter of the contract. In the situation of Coronavirus, an example would be if goods are contaminated and required to be destroyed. In such event, if the goods are being traded, the destruction of the goods may render the contract frustrated due to unexpected events.
- Restraint by injunction. In the landmark case of Codelfa Construction Pty Ltd v State Rail Authority of NSW, construction work noise affected the local residents and work shifts needed to be reduced as a result of injunctions. The majority of the court considered that the contract had been frustrated. In the current situation, if the government restrains trade by injunction due to infected personnels, this may give cause to frustration in contract.
It is important to note that irrespective of the magnitude of the Coronavirus outbreak, parties to a contract are still under an obligation to provide notice if the party seeks to rely on a force majeure clause or the doctrine of frustration under common law.
Force Majeure in Property Contracts
In Queensland, there is no automatic right to pull out of a contract even in the event that a property is damaged. In addition, most Queensland property contracts indicate that “time is of the essence”, this means time limits must be strictly observed in all circumstances and there is no automatic right for a party to extend dates because of delays.
Property Purchase and Sale Contracts
In the standard Real Estate Institute of Queensland Contract for Houses and Residential Land (“the Contract”), clause 6.2 provides a Suspension of Time clause for events when a party is unable to perform a Settlement Obligation solely as a consequence of a Delay Event. Such Event is defined in clause 6.2(8)(b) to include:
- A tsunami, flood, cyclone, earthquake, bushfire or other act of nature;
- Riot, civil commotion, war, invasion or a terrorist act;
- An imminent threat of an event in paragraphs (i) or (ii); or
- Compliance with any lawful direction or order by a Government Agency.
If you are currently negotiating a real estate contract, it is important for a special clause to be inserted in regards to Coronavirus/a pandemic.
If the contract has already been signed, it is important to note that you are only entitled to an extension if the other party agrees to an extension. In the current circumstance, if you become aware that there may be a potential delay due to the outbreak, it is important to communicate with the other party as soon as possible and negotiate a new settlement date.
Given that there is no clarity yet as to when the Coronavirus outbreak will be contained, it is important for parties under contractual obligations to prepare for circumstances where the relevant contractual obligations may be affected. Consult our Gold Coast lawyers for advice appropriate to your situation.
If you are in current contract negotiations, you should certainly consider including a force majeure clause that will protect you from the consequences of being unable to perform contractual obligations due to Coronavirus and other similar biological disasters.
This month Bushfires are raging across Queensland and destroying lives, homes and valuable properties along the way. The current situation across both Queensland and New South West is dire, with 50 bushfires burning in Queensland and 60 burning in NSW. At least three people have lost their lives to the fires and many others missing and injured. There are over 150 homes destroyed by blazes. Experts have warned that “this disaster is far from over and the worst may be yet to come with summer ahead.” With Christmas holidays just ahead, many Aussies may also travel for holidays, leaving their properties vulnerable to potential risks.
In this article, OMB Solicitors would like to discuss some of the important legal preparation Queenslanders should do.
- Make sure your insurance is up to date, and has the right cover for fire and flood.
- If you are letting your property, you’ll need to let your insurance company know you’re no longer living there and arrange landlord’s insurance. Your tenant will probably want to get contents insurance and many companies require door and window locks to be of a certain standard.
- If you are letting your property for short-term rentals (e.g. Airbnb, Stayz, Wotif etc.), you must check if your policy is compatible for this purpose. Certain policies may also distinguish between professionally managed properties or self-managed properties.
- Consider obtaining Insurance advice about securing life, TPD and trauma insurances.
- If your property gets damaged, be prepared to lodge an insurance claim soon after the event.
- Keep a list of emergency contacts you may need for dealing with recovery from a disaster.
- Prepare or update your Will and Enduring Power of Attorney. We recommend seeking proper legal advice from us when it comes to setting up a Will and/or Enduring Power of Attorney.
- Prepare an important documents kit, including a description of your home and a list of your valuable belongings. Compiling passwords and keeping this with your estate planning documents is also a handy hint.