Queensland implementation of National Mandatory Code of Conduct for commercial and retail leases

Introduction

Following the introduction of the National Cabinet’s Mandatory Code of Conduct for SME Commercial Leasing Principles during the COVID-19 crisis (the Code) in early April, there has been much anticipation and speculation as to how each of the States and Territories would legislate to give effect to the principles of the Code.

Along with Western Australia, Queensland has been among the last of the state and territory jurisdictions to pass legislation to give specific effect to the principles of the Code, although enabling legislation has been in place for some time in the form of the COVID-19 Emergency Response Act 2020.

On 28 May 2020, the Queensland Government finally passed the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Regulation). The Regulation takes effect from 29 March 2020 to 30 September 2020 (defined in the Regulations as the “Response Period”.)

Key points and departures from other Code legislation

While the Regulation is consistent with the Code and contains broadly similar concepts to the legislation passed by other States and Territories, it both elaborates upon some of the Code principles and departs from the Code and the legislation passed by other jurisdictions in several aspects.

It should be stressed that the following is an outline of some of the key aspects of the Regulation only, and is not intended as a comprehensive summary of the content of the Regulation particularly where that content does not differ in a material way from the Code and the legislation in other jurisdictions.

Leases to which the Regulation applies

Generally, the Regulation follows the Code and other legislation in defining what leases will be covered by the legislation. Broadly, an “affected lease” as defined in the Regulation is a lease which meets the following criteria:

• It is either a retail lease covered by the Retail Shop Leases Act 1994 (Qld), or a commercial lease under which the leased premises are to be wholly or predominantly used for carrying on a business (and in both cases, includes subleases, licences and other rights of occupation); and
• The tenant under the lease:

• is an SME entity (that is, an entity with turnover of less than $50 million for the current year); and
• is eligible for the JobKeeper Scheme (by contrast, in Victoria a tenant must actually be a participant in JobKeeper, while in NSW a tenant is required to qualify for JobKeeper).

In determining whether a tenant is an SME and/or is eligible for JobKeeper, the position of entities which are ‘affiliates of’ or ‘connected with’ the tenant entity may be taken into account (as those terms are defined in the Income Tax Assessment Act 1997 (Cth)). This reflects the principle of the Code that where the tenant is part of a group of companies, the overall financial position of that group should be taken into account when determining whether the lease in question meets the criteria for an SME tenant which the Code is intended to assist.

Franchisees and franchise lease arrangements captured

Where the Regulation most noticeably departs from the other jurisdictions in its definition of an affected lease is in making franchise arrangements explicitly subject to the legislation. While the legislation in other jurisdictions operates in such a way as to make it implicit that such arrangements will be captured, there has nevertheless been some uncertainty as to whether a lease between a franchisor and the landlord should be subject to the Code in circumstances where that lease would otherwise be disqualified because the franchisor is not an SME, or is not eligible for JobKeeper, or both.

The Regulation deals with this by including a section which expressly provides that if the tenant under an affected lease is a franchisee, a lease under which the franchisor is lessee of the premises occupied by the franchisee is also an affected lease¹. The definition of “franchisor” makes it clear that it includes a leasing entity that is connected with or an affiliate of the franchisor². This comprehensively deals with typical franchising arrangements whereby a franchisor (either directly or through a related company), occupies premises under a headlease and grants either a sublease or a licence to a franchisee to enable it to operate from the leased premises.

When lease must be in effect

One aspect of the Regulation which remains uncertain is the date on which the lease must be in effect in order to be an “affected lease”. The Regulation states that it must be “on the commencement the lease, or an agreement to enter into the lease, is binding on the lessee, whether or not the lease has commenced [our emphasis]”.³ It is not entirely clear whether this means the commencement of the Regulation, being 28 May 2020, or the commencement of the “response period”, being 29 March 2020 (although in order for the legislation to be workable, it would surely have to be the earlier date).

We understand that this point was raised by stakeholders in the course of reviewing the draft legislation, and it is disappointing to see that the final legislation does not provide clarity.

Freeze on rental increases

The Regulation provides some clarity on Leasing Principle 13 of the Code in that it allows rental increases to occur during the response period, however, does not require the tenant to pay the increased rent (and the increased amount cannot start to accrue) until the end of the response period.⁴ Section 13(4) of the Regulation does seem somewhat unbalanced from a landlord’s perspective, as it restricts a prescribed action against the tenant on the ground of a failure to pay increased rent when the response period ends on 30 September 2020. It is assumed the restriction ends on expiration of the Regulation (31 December 2020).

Again, we understand that these issues were raised by stakeholders in the course of reviewing the draft legislation, but have not been addressed in the final version.

Rent relief need not be directly proportionate to turnover reduction

One of the key principles of the Code, and one which has given rise to some uncertainty in its practical implementation, is the requirement that landlords must offer rent relief (in the form of waivers and deferrals) which is in direct proportion to the decline in turnover suffered by the tenant⁵. This creates obvious difficulties in situations where, for example, a tenant has only recently commenced trading, or where the nature of the tenant’s business means that it does not routinely record turnover in a way that can be easily measured and compared against previous periods. It also creates uncertainty about how future declines or fluctuations in turnover should be measured and accounted for in any rent relief measures.

The Regulation deals with this by removing any mandatory proportionality requirements, and instead simply provides that at least 50 per cent of any agreed rent reduction must be in the form of a rental waiver⁶. The tenant’s reduction in turnover is instead just one of a number of factors that the parties must take into consideration when negotiating the amount of rent relief, and the amount of any rent relief need not to be specifically proportional to the reduction in turnover.

Also, turnover is also expressly defined to exclude a grant or assistance given by the Commonwealth, State or a local government to mitigate the effects of the COVID-19 emergency (although it will include internet sales, something that is unlikely to please food operators already making only slim margins on sales through food delivery platforms)⁷.

Contracting out and preservation of parties’ rights

Another key feature of the Regulation is that it both:

• Allows the parties to an affected lease to expressly contract out of the Regulation (both in relation to the terms of any rent relief, and with respect to taking actions that would otherwise be prohibited under the Regulation, such as terminating an affected lease or drawing down on security);⁸ and
• Preserves the validity of any agreements entered into between the landlord and tenant (whether before or after the commencement of the Regulation) which would otherwise be inconsistent with the Regulation.⁹

This allows for commercial negotiations and flexibility between parties, at the same time giving effect to the principles of the Code.

Prohibition on “prescribed actions” by landlord

The prohibitions contained in the Regulation on terminating affected leases, drawing down security and other “prescribed actions” by the landlord are predicated upon the tenant essentially having engaged in a genuine attempt to negotiate rent relief with the landlord.¹⁰ In our view, there is benefit in legislating for this requirement for engagement because in practice we have encountered situations where a tenant is in arrears of rent and outgoings during March and April and have ignored attempts by the landlord to negotiate a solution; meanwhile, the landlord is prevented from calling on the tenant’s bank guarantee or taking other action to recover the arrears on the basis that the Code prohibits such actions.

The Regulation also makes it clear that a landlord may still take steps to enforce breaches which are unrelated to the effects of the COVID-19 emergency, such as arrears arising prior to the pandemic.¹¹

Deferred rent repayment period and retention of security.

The Regulation makes it clear that a landlord may retain a bank guarantee or other security until any deferred rent has been paid.¹²

The repayment period for any deferred rent is also capped at a maximum of 3 years¹³, in contrast to the Code which allowed for repayment over the greater of the term of the lease and 24 months.¹⁴

Further clarification is also provided in relation to the landlord’s obligation to extend the term of the lease to cover any period during which rent is waived or deferred, including that the landlord is not obliged to extend the lease where it is prevented from doing so because of an existing legal obligation (this may include, for example, where the lease in question is a sublease and the headlease term cannot be extended), or if the landlord can demonstrate that the landlord intends to use the leased premises for a “commercial purpose” of the landlord.¹⁵

Practically, landlords wanting to retain a bank guarantee after the lease has expired should ensure that the bank guarantee has no expiry date or is sufficiently long enough to cover the deferral period.

Small businesses can access the dispute resolution process

Part 3 of the Regulation deals with dispute resolution in relation to affected lease disputes, however, also includes small business tenancy disputes. Under the Regulation, a small business is one carried on by a sole trader or employing fewer than 20 full-time, or full-time equivalent, employees.¹⁶ There is some benefit in this for tenants of this nature because, even if they do not meet the qualifying criteria under the Regulation, there is simpler path for them in resolving disputes (as compared to raising a dispute to QCAT or other court jurisdiction).

Disclosure requirements dispensed with

Finally, the Regulation makes it clear that parties are not required to comply with any disclosure requirements contained in Part 5 of the Retail Shop Leases Act 1994 (Qld) in respect of variation of a lease under the Regulation.¹⁷ Given that these disclosure requirements can be onerous and often impractical in terms of timing requirements, this is a sensible and welcomed concession.

Where to from here?

We are hopeful that the long-awaited Regulation will provide some certainty to Queensland businesses who by now are well in the midst of the effects of the COVID-19 pandemic, with the legislation providing some useful clarification and guidance for both landlords and tenants who, in many instances, have already been trying to negotiate a mutually beneficial commercial outcome to keep leases on foot and businesses afloat through this difficult period.

Norton Rose Fulbright is continuing to provide advice and guidance to landlords and tenants of commercial and retail premises throughout Australia, as the country begins to move towards easing of restrictions and a return to “normality”. If you require assistance with any negotiations or guidance on your rights and obligations under the Regulation at any time, please do not hesitate to reach out to us.