Case study of a COVID-19 commercial lease dispute

In previous Journals, we have examined the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) (the Regulation) and its impact on landlords and tenants.

In the recent Queensland Civil and Administrative Tribunal (the Tribunal) decision of Maxwell & Perandis Pty Ltd ATF v Aztech Australia Pty Ltd [2021] QCAT 234, the Tribunal examined the application of the COVID-19 Emergency Response Act (Qld) (the COVID-19 Act) and the Regulation.

Background

In October 2019, Maxwell &; Perandis Pty Ltd trading as Coastal Pontoon and Jetty Repairs (the tenant) entered into a commercial lease with Aztech Australia Pty Ltd (the landlord). The lease was for a workshop space at Molendinar on the Gold Coast with rent payable of $4,000 per month, with increases of 3% per year, plus outlays.

In mid-2020, the tenant started to experience difficulties due to the COVID-19 pandemic and fell into rental arrears. The tenant sought to negotiate rent relief and the landlord voluntarily gave the tenant a rent reduction for April, May and June 2020 of $800 a month.

However, the tenant contended that the rent reduction was never agreed to as it wished to negotiate the amount of the reduction with the landlord. The tenant submitted that the landlord was not interested in seeing its financial figures so that a figure could be negotiated as required by the Regulation.

The tenant also argued that it was potentially entitled to further rent relief and sought the intervention of the Queensland Small Business Commissioner (QSBC) to assist in negotiating an appropriate rent reduction. However, the tenant did not seek the assistance of the QSBC until May 2021 and this process is still ongoing.

On 11 May 2021 and 2 June 2021, the landlord issued the tenant with notices to remedy breach. The notices required the tenant to pay the total outstanding rent of $23,705 (which included unpaid rent from January - June 2021) within 14 days or to vacate the premises by 16 June 2021.

The tenant subsequently filed a Notice of Dispute in the Tribunal pursuant to the COVID-19 Act seeking an order preventing the action of the notice to remedy breach to allow time for the process with QSBC (or QCAT if required) to be completed.

The Tribunal initially made an interim order restraining the landlord from acting upon the eviction notice until the dispute was determined.

Legislative background

The Regulation was initially operative between March 2020 and the end of September 2020. It was then extended to the end of December 2020.

The Regulation provides a dispute resolution framework that requires parties to act in good faith in mitigating the effect of COVID-19 on the parties. In addition to this, it also prevents a landlord from terminating an affected lease or from evicting a tenant.

When negotiating rent and other conditions, the parties are required to provide true and accurate information about their financial circumstances. If an agreement cannot be reached, there is a dispute resolution process pursuant to the Regulation, which includes the parties attending mediation.

Jurisdiction is then conferred on the Tribunal to hear and decide eligible lease disputes.

Application

The tenant contended that for the purpose of the Application, the amount of any rent outstanding could not be determined because there had not been a negotiation to which it is entitled pursuant to the Regulation.

However, the tenant did not take any prescribed steps or action during the response period to utilise the remedies available to it under the Regulation. As noted above, the tenant gave a dispute notice to the QSBC, however, this was not until May 2021 after the response period and when the Regulation ceased to have any force or effect (except for an ongoing dispute).

In any event, the landlord had not sought to recover any rental arrears during the operation of the Regulation. The only rental arrears the landlord sought to be paid was for the period 1 January 2021 to the date of the notice to remedy breach.

Jurisdiction

The question for the Tribunal was whether it had jurisdiction to grant a continuation of the injunction until the process with the QSBC had been completed.

The Tribunal noted that it does not have jurisdiction to hear disputes in respect of commercial leases under the Property Law Act. The subject lease was not a retail shop lease as defined in the Retail Shop Leases Act. However, the Tribunal noted that jurisdiction is conferred on the Tribunal pursuant to the COVID-19 Act and Regulation and concluded that the Regulation applied to the subject lease.

The landlord argued that the notice to remedy breach only related to the period from January 2021 and was not based on any rental arrears relating to the operational period of the Regulation.

Accordingly, the landlord argued that the COVID-19 Act and Regulation had no application to the dispute, which arose in 2021, after the response period and extension period (which expired on 31 December 2020).

Furthermore, the landlord maintained that the notice to remedy breach was a valid notice and, as the tenant had not complied with the notice, it was entitled to possession of the property.

Decision

The Tribunal held that the COVID-19 Act and Regulation did not apply to the landlord's claim for rental arears set out in the notice to remedy breach as the payments sought related to rental arrears from 2021 and were not in relation to any payments during the response period and extension period pursuant to the Regulation.

Therefore, the Tribunal held that it did not have jurisdiction to hear the tenant's application and the application was, therefore, dismissed.

Conclusion

The COVID-19 legislation expiry day has recently been extended to April 2022. Accordingly, disputes in relation to eligible leases for any period from March 2020 until 31 December 2020 remain actionable until April 2022.

This case demonstrates that importance of ensuring the correct processes are followed when utilising the remedies available pursuant to the COVID-19 Act and Regulation. Landlords and tenants should be mindful of relevant time periods and co-operate and act reasonably and in good faith when negotiating any lease variation.

Read our articles on COVID-19 for more updates like this.