Updates to COVID-19 Emergency Response Act 2020 and Commercial Leasing in SA
On 8 April 2020, the COVID-19 Emergency Response Act 2020 (Act) came into effect. The Act was accompanied by the COVID-19 Emergency Response (Commercial Leases) Regulations 2020 on 16 April 2020.
On 14 May 2020, the Act was amended by the COVID-19 Emergency Response (Further Measures) Amendment Act 2020.
On 15 May 2020, the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (Regulations) came into effect. The new Regulations replaced and revoked the COVID-19 Emergency Response (Commercial Leases) Regulations 2020.
The Act and the Regulations make a number of temporary modifications to South Australian law in response to the COVID-19 pandemic, including commercial leasing law.
The Act incorporates a number of measures that protect lessees of commercial leases affected by COVID-19.
Application of the Act
Under the Act, the Governor may make such regulations as are necessary or expedient for the purposes of mitigating the adverse impacts on a party to, or any other person with an interest in, a commercial lease resulting from the COVID-19 pandemic.
This will apply to a “commercial lease” which is defined as:
a) a retail shop lease within the meaning of the Retail and Commercial Leases Act 1995; or
b) a lease under the Landlord and Tenant Act 1936; or
c) 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:
i) whether or not the right is a right of exclusive occupation;
ii) whether the agreement is expressed or implied; and
iii) whether the agreement is oral or in writing, or partly oral and partly in writing.
It does not apply to a residential tenancy.
There is an extensive list of matters that the regulations may provide for, including:
a) the types or classes of commercial leases to which the regulations may apply;
b) the types of disputes in relation to a commercial lease to which the regulations will apply;
c) the provision of rent relief for a lessee under a commercial lease;
d) prohibiting or restricting the ability of a lessor to terminate a commercial lease;
e) the circumstances in which a lessor may terminate a commercial lease;
f) prohibiting, limiting or modifying the exercise or enforcement of the rights of a lessor under a commercial lease or other agreement or under any other Act or law or the common law;
g) the circumstances in which a person will be taken to be suffering financial hardship as a result of the COVID-19 pandemic;
h) any other matter regulating the parties to a commercial lease or any other person with an interest in a commercial lease or the provisions of a commercial lease or related agreement.
The regulations may have a retrospective effect to a date not earlier than 30 March 2020.
The current regulations made by the Governor are the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020.
The objectives of the Regulations are, having regard to the Mandatory Code of Conduct to:
a) the types or classes of commercial leases to which the regulations may apply;
b) implement temporary measures to apply to parties to certain commercial leases related to circumstances brought about by the COVID-19 pandemic; and
c) provide for mechanisms to resolve disputes concerning those leases.
The Regulations will apply for the “prescribed period” which means the period commencing on 30 March 2020 and ending on 30 September 2020. These Regulations will have a retrospective effect to 30 March 2020.
The Regulations will not apply to any lease entered into after the commencement of the prescribed period unless that lease is entered into following the exercise of an option to extend or renew the lease on the same or substantially similar terms.
Negotiate in good faith
The parties to a commercial lease are required to make a genuine attempt to negotiate in good faith the rent payable under the commercial lease during the prescribed period, having regard to:
a) the economic impacts of the COVID-19 pandemic on the parties to the lease;
b) the provisions of the Act and the Regulations; and
c) the provisions of the Mandatory Code of Conduct.
A lessor is not required to offer a lessee any proportionate reduction in rent payable in the form of waivers and deferrals as it is a matter for negotiation. However, if there has been a reduction in the lessee’s trade during the prescribed period it is expected that the lessor must offer such reduction to the lessee based on the lessee’s reduction in trade as part of the good faith negotiations having regard to the Mandatory Code of Conduct.
The Small Business Commissioner has published the COVID-19 Guidance Note for parties to a commercial lease to assist them in negotiations.
Where there is a failure of the parties to agree in the negotiations, a party may apply to the Small Business Commissioner for a mediation of the relevant dispute.
It is recommended that any agreement between the parties is subject to a documented agreement varying the commercial lease and signed by both parties. We can assist in negotiations and preparing any relevant documentation.
Prohibitions and restrictions
If a lessee is an affected lessee, a lessor cannot take any prescribed action (e.g. evicting a lessee, exercising a right of re-entry, terminating the lease, distraining goods, suing for damages, requiring performance by a guarantor or any other remedy available to a lessor against a lessee) against the lessee on grounds of a breach of the lease during the prescribed period consisting of:
a) a failure to pay rent;
b) a failure to pay outgoings; or
c) the business operating under the lease not being open for business during the hours specified in the lease.
This will not apply in the case of a failure to pay rent where the failure to pay the amount of rent during the prescribed period is agreed by the parties in a mediation of a dispute in relation to the commercial lease or it is determined by the Court and it is agreed or determined (as the case may be) that the failure to pay rent constitutes a breach of the lease or an order of the Court.
Where a lessor has already taken or commenced, but not yet completed or finalised a prescribed action, that action will be taken to be suspended until the end of the prescribed period.
These restrictions will not apply where the lessee is not an affected lessee (refer to the definition below).
A lessee will be an “affected lessee” if:
a) the lessee is suffering financial hardship as a result of the COVID-19 pandemic. A lessee will be taken to be suffering financial hardship as a result of the COVID-19 pandemic if the lessee is eligible for, or receiving, a JobKeeper payment in respect of the business of the lessee (whether in their capacity as an employer or on their own behalf); and
b) the following turnover in a relevant year was less than $50 million:
i) if the lessee is a franchisee – the turnover of the business conducted at the premises the subject of the commercial lease;
ii) if the lessee is a corporation that is a member of a group – the turnover of the group; and
iii) in any other case – the turnover of the business conducted by the lessee at the premises the subject of the commercial lease.
No Breach or Termination
Any act or omission by a lessee in response to the COVID-19 pandemic will be taken not to amount to a breach of lease or constitute grounds for termination of the lease or the taking of any prescribed action by the lessor against the lessee.
Where a lessee is an affected lessee, the rent payable under a commercial lease must not be increased unless otherwise agreed between the parties.
The provision does not apply to any rent or a component of rent determined by reference to turnover.
A lessor must not during the prescribed period require a lessee to pay land tax or require the reimbursement of land tax where the lessee is suffering financial hardship as a result of the COVID-19 pandemic.
Mediation – Small Business Commissioner
A party to a commercial lease may apply to the Commissioner for a mediation of a relevant dispute in relation to a commercial lease. This process involves lodging a request for mediation on the Commissioner’s website.
A lessee must be an affected lessee before it can apply for mediation.
A party may apply to the Commissioner for mediation on various grounds depending on the nature of the dispute in relation to the commercial lease, including:
a) where there is a failure of the parties to agree on the rent payable under the commercial lease during the prescribed period following the good faith negotiations;
b) where the lessor has taken or has threatened to take prescribed action; and
c) where the lessee is an affected lessee and there has been an increase in the rent.
Where a party to a commercial lease applies to the Commissioner for mediation, the Commissioner must issue each party will a Certificate stating:
a) the names of the parties; and
b) any of the following (where applicable):
i) if mediation has failed or is unlikely to resolve the dispute – that the mediation has been terminated without resolution;
ii) if mediation would not be reasonable in the circumstances – that fact; or
iii) if a party to the commercial lease refused to participate, or did not participate in good faith, in mediation – that fact.
Mediation will not be available where either the Commissioner determines that it would not be reasonable or a party refuses to participate. Mediation can also be terminated by the Commissioner if the Commissioner determines that a party did not participate in good faith or has failed or is unlikely to resolve the dispute.
There is no cost for the mediation. Parties will need to sign a mediation agreement prior to the commencement of the mediation.
A person must not divulge or communicate personal information, information relating to business processes or financial information (including business turnover) obtaining in connection with the mediation except with the consent of the person whom the information relates, the authorisation of the Commissioner, for the purpose of legal proceedings or to a police officer.
If a Commissioner has issued a Certificate, a party to a commercial lease may apply to the Magistrates Court for a resolution of a relevant dispute in relation to a commercial lease. A party is not entitled to apply to the Court without a Certificate by the Commissioner. This is to ensure that the parties have attempted to resolve the dispute through the mediation process.
The Court can determine whether or not a lessee is an affected lessee and will have regard to the following in making that determination:
a) whether or not the Lessee is eligible for, or receiving, a JobKeeper payment; and
b) any reduction in turnover of the lessee during a specified period as compared with another specified period determined by the Court as being relevant to the circumstances of whether or not the lessee is suffering financial hardship as a result of the COVID-19 pandemic.
The reduction in turnover will need to be verified by financial records or statements provided by the lessee.
The Court may make any one or more of the following orders:
a) an order granting rent relief to an affected lessee in relation to payment of rent under the commercial lease;
b) an order requiring the payment of some or all of the rent under a commercial lease into the Court until the lease has been performed;
c) an order requiring that rent paid into the Court be paid out and applied as directed by the Court;
d) an order modifying the terms and conditions of a lease in a manner specified in the order;
e) an order to defer the payment of rent under an affected lease for a specified period not exceeding 24 months from the day on which the order is made; and
f) any other orders the Court thinks necessary or desirable to resolve a dispute between the parties to a commercial lease.
Where the Court makes an order granting rent relief to an affected lessee, then at least 50% of the rent relief (as determined by the Court) must be in the form of a waiver. This threshold is consistent with the rent relief principles in the Mandatory Code of Conduct.
Further, the Court must regard to the following in making an order granting rent relief to an affected lessee:
a) the obligations of the lessor under the Act, a relevant Act and the Regulations;
b) the reduction in turnover of the business of the lessee during the prescribed period;
c) whether the lessor has, during the prescribed period, agreed to waive recovery of any outgoings or other expense payable by a lessee under the lease;
d) whether a failure to provide rent relief would compromise the lessee’s ability to fulfil the lessee’s ongoing obligations under the lease, including the payment of rent;
e) the ability of the lessor to provide rent relief, including any relief provided to the lessor by a third party in response to the COVID-19 pandemic;
f) any reduction by a third party to outgoings in relation to the premises the subject of the lease; and
g) any other matter the Court thinks fit.
In the case of an order to defer the payment of rent under an affected lease for a specified period not exceeding 24 months, the Court may also make an order extending the term of the lease for the period for which rent is referred under that order.
Where the parties have agreed to a variation of any commercial lease between 30 March 2020 and 15 May 2020 (i.e. during the operation of the revoked Regulations and prior to the commencement of the new Regulations), the Court cannot make an order to modify the terms of that agreement during that period, however the Court can make an order to modify it from 15 May 2020.
Johnston Withers Lawyers: Experience You Can Trust
If you are a lessor or a lessee affected by the COVID-19 pandemic, we can assist you in any of the following:
a) giving advice under the Act and Regulations;
b) negotiating on your behalf;
c) preparing an agreement to vary the terms of your commercial lease following negotiations;
d) lodging a request for mediation to the Commissioner; and
e) applying to the Magistrates Court for a resolution of a dispute.
Our commercial and property lawyers have extensive experience in acting for lessors and lessees in relation to all aspects of commercial and retail leases. If you need advice or direction from a lawyer, please contact Michael Stannard on (08) 8231 1110 or get in touch online.