New rules cover rental reductions
A NEW FEDERAL GOVERNMENT REGULATION, ADOPTED BY QUEENSLAND, SIGNIFICANTLY ALTERS THE RIGHTS AND OBLIGATIONS OF LANDLORDS AND TENANTS UNDER LEASES
QUEENSLAND’S retail and commercial landlords and tenants are facing prescriptive rules for negotiating rent reductions and deferrals in the wake of the COVID-19 economic fallout.
The National Cabinet released a Mandatory Code of Conduct for Commercial Tenancies and asked the States and Territories to implement it.
The Queensland Parliament’s interpretation of the National Code has now been released. The new regulation significantly alters the rights and obligations of landlord and tenants under leases.
The new regulation applies to retail shop leases and premises predominantly used for carrying on a business.
To qualify as an “affected lease” under the regulation, the tenant must be a small or medium enterprise with an annual turnover of less than $50 million and be eligible for the JobKeeper Scheme, with a fall in turnover of 30 per cent or more.
The regulation offers protection to tenants from some of the usual provisions of leases.
Landlords are prohibited from increasing rent, unless it is turnover rent, and are prohibited from recovery actions or calling on securities or guarantees for a tenant’s failure to pay rent, outgoings or to open for business. The landlord canterm not charge interest or other fees on rent reductions or deferrals unless the tenant defaults on payments.
Relief for tenants in the form of rent reductions, rent deferrals and changed lease conditions can be negotiated for the relief period from March 29 to September 30, known as the “response period”. There had been some expectation that it would extend to a subsequent recovery period, as suggested by the National Code, but that was not adopted in Queensland.
A party must formally start the negotiation process by giving notice to the other, asking them to negotiate the lease conditions. The parties must then exchange “sufficient information” that will support them in negotiating transparently and in good faith.
The information exchanged might include evidence of the tenant’s turnover decline and the landlord’s capacity to offer relief. Within 30 days after receiving sufficient information, the landlord must offer the tenant a rent reduction and any other proposed changes to the lease conditions.
While the landlord’s offer must have regard to the tenant’s circumstances and loss of turnover, it does not strictly require proportionality with the loss of turnover, which was a concept put forward in the National Code.
The offer must provide 50 per cent or more of any rent relief as a rent waiver.
For a rent deferral, the repayment period must not commence until the end of the response period and can be over a period of two-to-three years.
If a rent deferral is offered, the landlord is to also include an offer to extend the lease for the same period, if they do not have another use for the premises.
The parties are required to co-operate, act reasonably and negotiate in good faith rent relief and other changed lease conditions.
A lease variation or other written agreement can be used to give effect to the rent relief or changed conditions.
If the parties cannot reach agreement, Queensland’s new Small Business Commissioner can be asked by a party to refer the matter to mediation and appoint a mediator.
Parties must attend the mediation. Only after mediation can the dispute be referred to arbitration or a court, if it needs further resolution.
If an agreement has already been reached, including before the regulation was released, and there is a material change in circumstances, such as a change in business turnover, a party can seek to renegotiate under this same process. However, a landlord’s revised offer does not need to include that 50 per cent of any additional rent relief as a rent waiver.
Landlords and tenants should take steps to understand the new process and what is required from them if the process is commenced, importantly around providing information and negotiating in good faith. Taking care to document any agreement reached provides certainty for the parties and allows the arrangements to be revisited if circumstances change.