COVID-19 response: Retail shop leases and other commercial leases

COVID-affected commercial leasing

This article highlights the various amendments across the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld Regulation) since its operation, including the current status of the Qld Regulation and how it will impact landlords and tenants.

An amendment to the Qld Regulation was given effect on 29 September 2020 - the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Amendment Regulation 2020 (First Amendment). The main purpose of the First Amendment was to extend the Qld Regulation's operation to 31 December 2020 in order to mitigate the effects of COVID-19 on landlords and tenants under affected commercial and retail leases for an extended period of time.

The First Amendment was subsequently amended on 4 December 2020 by the COVID-19 Emergency Response and Other Legislation Amendment Act 2020 (Second Amendment). The Second Amendment extended the operation of the Qld Regulation to the 'COVID-19 legislation expiry day', defined under s 4(A) of the COVID-19 Emergency Response Act 2020 as 30 April 2021 or another day as prescribed by regulation as the COVID-19 legislation expiry day, whilst also providing additional amendments that commercial/retail landlords and tenants under affected leases need to be aware of when negotiating lease variations or any continuation of rent relief.

The Second Amendment has been further amended as of 5 February 2021 by the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Amendment Regulation 2021 (Third Amendment). The Third Amendment does not extend the operation of the Qld Regulation, rather it provides a 'cut-off' seemingly heading towards an expiry date for various support to tenants available under the Qld Regulation.

Amendments to Qld Regulation

The definition of 'affected leases' remains tied to the eligibility for the JobKeeper scheme, whereby the lease of a premises is an affected lease during the extension period only if the tenant under the lease is eligible for the extended JobKeeper scheme (for the period from 28 September 2020 to 28 March 2021). Under the Second Amendment, tenants with an affected lease:

• may not be evicted or have their lease terminated for non-payment of rent or outgoings during the response period (29 March 2020 to 30 September 2020) or extension period (1 October 2020 to 31 December 2020);

• must have rent reduced in proportion to their lost turnover and may not have their rent increased during the response period or extension period;

• may not be penalised for reducing trading hours or not opening; or

• may not have a claim made by their landlord on a bank guarantee or security deposit for unpaid rent or outgoings.

Under the Qld Regulation, tenants received the benefit of these same relief measures.

The First Amendment extended part 2 of the Qld Regulation, containing the obligations of landlords and tenants under affected leases, to include lease variations and agreements relating to an affected lease (amendment to s 10 of the Qld Regulation). It appeared that parties' entry into an agreement did not prevent a tenant under an affected lease from seeking to re-negotiate a condition of a lease under part 3 of the Qld Regulation, which contains the dispute resolution provisions.

Likewise, the exceptions contained in the Qld Regulation enabling a landlord to take prescribed action in limited circumstances under s 12 (including on grounds not related to the effects of the COVID-19 emergency) were broadened under the Second Amendment so that they were not limited to the response period, but rather to during or after the response period or the extension period. A landlord under an affected lease was not able to take a prescribed action on any of the following grounds (s 12(1)):

• a failure to pay rent for a period occurring wholly or partly during or after the response period or extension period;

• a failure to pay outgoings for a period occurring wholly or partly during or after the response period or extension period; or

• the business carried on at the leased premises not being open for business during or after the hours required under the lease during the response period or extension period.

Prescribed Actions unchanged

The 'Prescribed Actions' remained the same in the First Amendment and Second Amendment as they were in the Qld Regulation, and include an action under a lease for recovery of possession, termination of the lease, eviction of the tenant, exercising a right of re-entry, seizure of any property, forfeiture, damages, payment of interest, fees or charges relating to unpaid rent or outgoings, a claim on a security for unpaid rent or outgoings, performance of an obligation by the tenant or any guarantor or exercising any other right by the landlord under the lease (s 9).

No increase of rent payable under the First Amendment and Second Amendment

Under the First Amendment and Second Amendment, a landlord under an affected lease must not increase rent payable during the response period or extension period, unless the parties agree in writing (s 13). In that case, a landlord must not give effect to an increase in rent until the extension period ends. A landlord can increase rent during the extension period under a variation of the lease or agreement entered into with a tenant, if the rent was subject to review before the extension amendment commenced. Despite this, a landlord cannot during or after the response period or extension period, take a prescribed action against a tenant for failure to pay an amount equal to or representing the amount of the increase. A landlord may give effect to a rent increase calculated by reference to the turnover of the business carried on at the leased premises. Under the Third Amendment, a landlord may increase rent payable as of 5 February 2021 if they refrained from increasing rent since 29 March 2020.

Negotiating rent payable - 50% waiver of rent not required

When negotiating rent payable during the extension period, a landlord can take into account any rent reduction already offered or given in relation to the period before the commencement of the extension period, if a further reduction is requested by the tenant (s 15(2)(a)). Negotiations may occur in relation to any or all of the rent payable during the response period or extension period. Section 14(1) provides landlords and tenants with clarity as to when requests for rent negotiation can be made. The obligation on a landlord to provide 50% of the rent reduction by way of waiver (leaving the balance as a deferral paid as instalments after the response period) has been removed under the First Amendment and Second Amendment for the extension period only (new s 15(5)). Therefore, under the First Amendment and Second Amendment, the whole of any rent reduction may have been in the form of a deferral, which provided landlords with greater flexibility when negotiating with tenants during the extension period. Tenants could, at the time of the First Amendment and Second Amendment being in place, still seek to renegotiate conditions of their lease despite any agreements or variations in place. The Third Amendment potentially changes the ability of tenants to renegotiate conditions of their lease as explored further below.

Deferring rent payable

In the First Amendment and Second Amendment, the requirements relating to deferred rent under s 17 were also separated into those relating to the deferred rent during the response period, and those relating to deferred rent during the extension period. If the rent was deferred during the response period, then a landlord must not require payment of the deferred rent until after 30 September 2020, whereas if the rent was deferred during the extension period, then a landlord must not require payment of the deferred rent until after 31 December 2020. Rent must still be paid by an agreed method over at least two years but no longer than three years and rent must not incorporate any additional fees or interest. The First Amendment and Second Amendment do not alter the obligation on a landlord to grant an extension of term equivalent to the period of waiver or deferral of rent. Reduced services are also permitted during extension period if a tenant is not operating from premises subject to an affected lease (s 19).

Dispute resolution

Under the First Amendment and Second Amendment, part 3 of the Qld Regulation, relating to affected lease disputes and small business tenancy disputes (each an 'eligible lease dispute'), largely remained unchanged, except that any proceedings or disputes commenced against a tenant with an affected lease were to be put on hold until the end of the extension period, rather than the end of the response period (s 48).

In terms of dispute resolution options, the First Amendment, Second Amendment and Third Amendment have not substantively changed the options available to landlords and tenants. The parties to a lease must attempt to resolve any dispute themselves before commencing mediation. If there is no resolution between the parties themselves, assistance and mediation services may be requested from the Queensland Small Business Commissioner. Subsequently, if there is no resolution, QCAT has jurisdiction to hear and decide affected lease disputes, including through the extension period.

Third Amendment - the latest update to the Qld Regulation

The Third Amendment essentially imposes a timeframe on the rent relief and other support provided under the Qld Regulation in a bid to take steps transitioning to the expiry of the Qld Regulation by providing a definition of 'ineligible leases' in Part 5, Division 2 - Transitional Provisions.

If, before the commencement of the Third Amendment (5 February 2021):

• a landlord had refrained from taking a prescribed action during the extension period under s 12, then from the commencement of the Third Amendment, such landlord may take a prescribed action under the lease as if s 12 had never applied to the lease;

• a tenant had applied to QCAT or a court for an order referred to in s 12(3), then from the commencement of the Third Amendment, the application lapses;

• a landlord had refrained from increasing the rent payable or taking a prescribed action under s 13, then from the commencement of the Third Amendment, such landlord may increase the rent payable, or take the prescribed action against the lessee, as if s 13 had never applied to the lease;

• a landlord had made an offer under s 15 and the offer had not been accepted in writing, then from the commencement of the Third Amendment, such offer is taken to have been withdrawn; and

• a dispute notice was given to the Queensland Small Business Commissioner under s 26 in relation to the lease, then from the commencement of the Third Amendment, the notice is taken to have been withdrawn under s 35.

The Third Amendment also applies to ineligible leases in respect of which parties previously reached a resolution to any dispute by way of a settlement agreement, an order by a court or tribunal, or withdrawal, comprising all leases that would have constituted 'affected leases' under the First Amendment and Second Amendment.

Conclusion

Now that the Amendment Regulations are in effect, landlords and tenants need to be aware of how the amendments will further affect the parties' respective rights and obligations under affected leases, and those leases already varied. The grant of an extension period under the First Amendment and Second Amendment supported the tenants of affected leases for a further period from 1 October 2020 to 30 April 2021. However, the addition of the Division 2 - Transitional Provisions in the Third Amendment allows certain landlords to enforce their rights under a lease and prevents tenants from accepting any offer previously made by a landlord after 5 February 2021. A lease of premises is an affected lease during the extension period only if the tenant is eligible for the extended 'JobKeeper scheme 2.0' (for the period from 28 September 2020 to 28 March 2021). Likewise, ineligible leases are now any leases of premises that, other than for the commencement of the Third Amendment, would have been an affected lease - therefore tenants have limited recourse to relief unless relief was sought prior to 5 February 2021. Both parties must still co-operate and act reasonably and in good faith when negotiating any lease variation.

Under the First Amendment, Second Amendment and Third Amendment, the framework for negotiation and resolution of disputes remains the same as under the Qld Regulation, except that time limits exist under the Third Amendment.

Landlords are not required to follow through on any offers made previously, if the tenant has not accepted that offer in writing. They are also not refrained from increasing rent payable or taking a prescribed action going forward, giving landlords a sense of certainty in relation to any rent relief options offered or already in effect, as well as allowing both landlords and tenants to start taking steps back to a 'normal' state of affairs.

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