Covid 19 and Leasing

Basically, the main points are as follows:

1. What leases are covered by the regulation?

To be covered by the regulation, the lease has to meet all of the following criteria:

a. A retail shop lease or lease for the carrying on the business of the tenant;

b. It was current when the regulation started in May this year;

c. It is of premises where the tenant carries on business (or is a non profit body);

d. The tenant’s turnover was less than $50,000,000 in the 2019 financial year or likely to be under $50,000,000 in the 2020 financial year;

e. The tenant is eligible for (but does not have to be enrolled in) the JobKeeper scheme.

2. Ability to contract out

It is open for landlords and tenants to make agreements that are inconsistent with the regulations (ie there is nothing to say that the regulations must be followed if the landlord and the tenant agree otherwise).

3. General prohibition on enforcement action for period ending 30 September 2020

The structure of the Act is to set up a general prohibition on the landlord taking action against the tenant for various breaches (eg failure to pay rent or outgoings or for the failure of the tenant to open the business) between the end of March and 30 September 2020. That however does not stop the landlord from taking action under a settlement agreement or variation to a lease made under the regulation, or an order of the court or tribunal or if the tenant failed to cooperate with the regulations.

This obligation can be enforced by the tenant making application to the tribunal (ie the tribunal can restrain the landlord from exercising rights under the lease).

4. Rental increases not effective during period 29 March to 30 September 2020

Any rental increase under a lease is deferred until 1 October 2020.

5. Negotiation procedure

5.1 Initiation

Either party to the lease (usually the tenant) can in writing ask the other party to negotiate the rent and other stated conditions of the lease.

As soon as practicable after that, each party has to give the other information relating to the request that is correct, and sufficient to enable the parties to negotiate in a fair and transparent way. On the part of the tenant, this includes what the tenant wants, information as to why it is an affected lease, financial information, information relating to JobKeeper, and what the tenant is doing to mitigate the effects of COVID-19.

On the part of the landlord, it is likely to be information concerning any reduction in rates and land tax or other expenses, and also potentially information concerning the landlord’s financial commitments in respect of the property, if the landlord was to say that their ability to make concessions is limited by financial obligations to its lenders.

This financial information is protected under a section later in the regulation.

5.2 Negotiation

Within 30 days after the information is received, the lessor must offer the lessee a reduction in the rent payable and any proposed changes to other conditions. The offer must include that:

a. Of the amount by which the rent is proposed to be reduced, no less than 50% is to be a waiver (ie it can never be recovered);

b. The offer must have regard to the circumstances of the lease including the reduction in turnover of the business carried on at the leased premises (ie arguably this means that the success of that particular premises is important), the extent to which the failure to reduce the rent would reduce the lessee’s ability to comply with the lease and have regard to the lessor’s financial position including any benefits received (ie land tax reductions).

5.3 Negotiate in good faith

After the offer is received, the parties are to negotiate in good faith to arrive at the reduction in the rental payable under the lease for the period to 30 September 2020.

6. Tenant may make second request

In the event that an expectation of the tenant (eg in relation to its recommencement of trading) is not met, the tenant may ask for a further reduction in rent.

7. Deferred rent

Insofar as it is agreed that part of the rent is deferred (rather than waived), the parties have to agree to the repayment of that amount over a period of not less than two years and not more than three years after 1 October 2020. There is to be no interest on that, except if there is a default in payment and the lessor is entitled to retain the lessee’s security until the amount is paid.

8. Landlord bound to extend lease

For the period that the rent is waived or deferred (eg six months, if for the whole of the response period), the lessor must offer the lessee an extension of the lease on the same terms as apply to the lease except that the rent is adjusted for the waiver or deferral.

There is some question as to what exactly is meant by the words “except that the rental payable during the extension must be adjusted for the waiver or deferral”. Does it mean that the rent has to be the same rate as is payable during the waiver or deferral period (ie if it is reduced to 50%, then the rent for the extension period is also 50%), or does it mean that the rent for the extension period can be increased to recoup the rent lost during the waiver or deferral period? You will have to engage us to have our opinion on that, although one opinion we would offer for free is that it could have been made absolutely plain by the addition of a few words.

9. Landlord may reduce services at leased premises

To the extent that the tenant is unable to operate, the landlord may cease or reduce services at the premises to the extent reasonable, subject to any reasonable request of the tenant.

10. Dispute resolution

The regulation provides mechanisms for dispute resolution.

For advice in respect of compliance with the Regulation and all leasing matters please contact Peter Muller on 0755 740111.