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Commercial leasing code requirements – support for tenants and landlords in response to coronavirus (COVID-19)

The Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (the regulation) came into effect on 28 May 2020. This regulation implements the National Cabinet mandatory code of conduct - SME commercial leasing principles during COVID-19 (PDF, 235KB) (the Code). The main purposes of this regulation are to:

  • mitigate the effects of COVID-19 on small business tenants and landlords under affected leases
  • establish a process for resolving lease disputes.

The Code is given effect, and the regulations apply, to lease arrangements between 29 March 2020 and 30 September 2020.

During this period, businesses with affected leases:

  • may not be evicted or have their lease terminated for non-payment of rent or outgoings
  • must have rent reduced in proportion to their lost turnover (at least 50% of the rent reduction offered must be in the form of a waiver, leaving the rest to be deferred)
  • may not have their rent increased
  • may not be penalised for reducing trading hours or not opening
  • may not have a claim made by their landlord on a bank guarantee or security deposit for unpaid rent or outgoings.

Note: The information on this page is not specific legal advice and you should seek expert advice for your situation. This material is not specific to individual circumstances and does not replace the detail in the regulation. Refer to the regulation for further information.

Definitions

The following terms are used throughout the regulation and explanatory content.

Affected leases

A lease is considered an affected lease if it meets all of the following criteria:

  • It is a retail shop lease or a lease for carrying on the business of the tenant.
  • It was current when the regulations commenced (28 May 2020).
  • It is a lease of a premises where the tenant carried on business or was a non-profit body in the current financial year.
  • The tenant's turnover was less than $50 million for the 2018–19 financial year, or turnover is likely to be under $50 million for the 2019–20 financial year.*
  • The tenant is eligible for, but not necessarily enrolled in, the JobKeeper Payment scheme.

A lease for the purposes of this scheme may include a lease, sub-lease, license or other agreement to occupy premises.

Note: A tenant does not need to be enrolled, and actively participating, in the JobKeeper Payment scheme to meet the requirements for an affected lease. Visit the Australian Taxation Office to determine eligibility for the JobKeeper Payment Scheme.

Read section 5 of the regulation for more detail about affected leases, including for franchises and farming leases.

Where the lease is not an affected lease, the Australian Government's Mandatory Code of Conduct (PDF, 235KB) should be used as a guide by the tenant and landlord. The Code has an established set of leasing principles which obliges both parties to negotiate in 'good faith' and genuinely cooperate to reach agreement.

Note: An affected lease and an eligible lease may be different and are defined in the regulation.

* When calculating turnover for the purposes of determining if the business is an SME entity, you will generally need to consider:

  • the proceeds of sales of goods and/or services, including internet sales
  • commission income
  • repair and service income
  • rent, leasing and hiring income
  • government bounties and subsidies
  • interest, royalties and dividends
  • other operating income.

Do not include any COVID-19 financial assistance or support provided by the government in turnover calculations.

Prescribed action

A prescribed action is defined in section 9 of the regulation as an action or the starting of a proceeding in court or tribunal, such as the Queensland Civil and Administrative Tribunal (QCAT), for any of the following in relation to a lease or other agreement:

  • recovery of possession
  • termination of the lease
  • eviction of the lessee
  • exercising a right of re-entry to premises
  • seizure of any property, including for the purpose of securing payment of rent
  • forfeiture
  • damages
  • the payment of interest, or a fee or charge relating to, unpaid rent or outgoings
  • a claim on a bank guarantee, indemnity or security deposit for unpaid rent or outgoings
  • the performance of an obligation by the lessee or another person under a guarantee under the lease
  • exercising or enforcing another right by the lessor under the lease or other agreement relating to the leased premises.

Response period

The response period:

  • starts at the beginning of the day on 29 March 2020
  • and
  • ends at the end of the day on 30 September 2020.

Good faith

Examples of what the Queensland Small Business Commissioner considers as 'good faith' include the following:

  • A tenant submits information to the landlord which confirms their eligibility for the JobKeeper Payment scheme including the turnover figures they used and the periods they compared.
  • A tenant provides the receipt from the Australian Taxation Office (ATO) demonstrating eligibility for the JobKeeper Scheme.
  • A tenant or landlord willing to share, in a proportionate, measured manner the financial risk and cash flow impact during the COVID-19 period.

Examples of what the Queensland Small Business Commissioner considers as not dealing in 'good faith' include the following:

  • A landlord or tenant demanding information beyond what considered 'sufficient information' to inform negotiations.
  • Harassing or intimidating the other party.
  • Placing onerous requests for documentation especially if they involve paying a fee to produce or access.
  • Refusing to respond. In most cases, the failure to respond to a reasonable request is itself unreasonable.
  • A landlord failing to make an offer to a tenant's request to negotiate rent within the timeframe.
  • A tenant refusing to submit information to the landlord which confirms their eligibility for the JobKeeper Payment scheme.
  • A tenant refusing to disclose any information from a business activity statement or accounting system to substantiate their decline in turnover if they are not providing evidence of participating in the JobKeeper Payment scheme.
  • A landlord not passing on any reductions in outgoings.
  • A tenant or landlord agreeing to mediation but then postponing the mediation date on more than one occasion.

Before commencing lease negotiations

Tenants and landlords should consider COVID-19 financial support mechanisms they might have access to, for example:

  • mortgage relief from a bank
  • land tax reductions.

Both parties should work out what rent reduction is possible in their own financial positions. If you need help with this you can contact the Small Business Financial Counselling service closest to you.

If you need help working out what support your business is eligible for, phone the Small Business Hotline on 1300 654 687 or use the coronavirus (COVID-19) business assistance finder.

Process to negotiate leases under the regulation

The purpose of the regulation is to give effect to the leasing principles in the National Cabinet mandatory code of conduct – SME commercial leasing principles during COVID-19.

  • Phase 1: Request
    The initiator (either tenant or landlord) writes to the other party requesting to negotiate an affected lease under the regulation.
  • Phase 2: Share sufficient information
    The tenant and landlord share sufficient information that allows both parties to negotiate in a fair and transparent way.
  • Phase 3: Offer
    Once sufficient information is received, the landlord must respond to the tenant by offering a proportionate rent reduction and any other proposed changes to lease conditions.
  • Phase 4: Negotiate
    After receiving the offer from the landlord, the tenant and landlord can continue to negotiate the rent reduction and other changes to lease conditions. Both parties must cooperate and act reasonably and in good faith when negotiating.
  • Phase 5: Agreement
    If agreement is reached, document what has been agreed to in writing as a variation to the lease or another agreement. If agreement can't be reached, either party may give notice of an eligible lease dispute (a dispute notice) to the Queensland Small Business Commissioner.

Rent reductions

Tenants of affected leases are entitled to request to negotiate their rent and other conditions.

A tenant must sufficiently demonstrate their business has experienced a loss of turnover for their landlord to offer a proportionate rent reduction. This should be calculated in line with the JobKeeper turnover test.

The landlord must respond with an offer to the tenant within 30 days of receiving sufficient information to consider the request.

At least 50% of the rent reduction offered by a landlord must represent a waiver, leaving the rest to be a deferral paid as instalments after 30 September 2020. The below short video explains how the rent reductions work.

Transcript of video

The landlord can also take their own financial position into account when offering a rent reduction. The landlord can offer any reduction amount but the offer must be informed, reasonable and made in good faith. Read section 15 of the regulation for more information.

Rent reductions for affected leases must be for all or any part of the rent due for the duration of the response period (29 March 2020 to 30 September 2020).

Both parties must negotiate in good faith and try to reach an agreement without coercion.

Legally, both the tenant and landlord must cooperate and act reasonably in all discussions and actions associated with COVID-19 related lease arrangements.

Examples of rent reduction negotiation

Example 1

Julia is a tenant of an affected lease and has approached her landlord Bec for reduction of rent.

Julia has provided sufficient information to Bec who is satisfied Julia's business has experienced a 30% decline in usual turnover. Bec responds to Julia and offers to reduce the rent by 30% (being the portion of reduced turnover) for the period 29 March 2020 to 30 September 2020.

15% of Julia's usual rent is waived, and the remaining 15% reduction is deferred to be repaid in instalments after 30 September.

Julia continues to pay 70% of her usual rent to Bec and must start paying back the deferred rent after 30 September. Bec and Julia will negotiate and agree upon the value and length of time for those instalments to be paid and make an agreement of the arrangements in writing.

Example 2

Lucas runs a gym and has experienced a 100% reduction in turnover since being forced to close because of COVID-19 restrictions.

Lucas has written to the landlord Malcom asking to negotiate the rent, namely a 100% rent reduction. Malcom considers this request, and his own circumstances. Malcom explains to Lucas that he has to pay a mortgage, rates and insurance on the property and that the rent is his only form of income as a retiree. Malcom provides information to Lucas demonstrating that he has unavoidable costs for the property.

Malcom offers Lucas a 75% rent reduction comprised of a 40% waiver and a 35% deferral to be paid after 30 September 2020. Lucas and Malcom enter negotiations and go back and forth. Lucas and Malcom decide upon an 80% rent reduction comprised of 45% waiver and 35% deferral. Lucas continues to pay 20% of the rent until the 30 September.

Lucas has been able to run one-on-one PT sessions and approached his bank for a small overdraft. Lucas starts to repay the deferred amounts after 30 September, spread over a 2 and a half year period as agreed.

Example 3

Barb owns a business that is the tenant on leases for a pub and a detached bottle shop. The pub has closed due to COVID-19 restrictions and has had a 100% decline in turnover. The bottle shop is still open and has suffered a 20% decline in turnover. According to the JobKeeper turnover test, Barb’s whole business (the lessee under the leases) has suffered a combined decline of 60% and she has therefore determined her business is eligible for JobKeeper. Barb’s business meets the other requirements to be considered an affected lease.

Barb contacts George, the landlord of the bottle shop and asks to negotiate a rent reduction. Barb provides the information used in the JobKeeper test that shows her whole business has suffered a 60% decline in turnover. George has had a reduction in some outgoings which he has passed onto Barb already.

George takes this into account and his own financial position and decides to offer Barb a 40% reduction in rent for the detached bottle shop, comprised of 20% waived rent and 20% deferred rent. In negotiating, Barb, shows George some information from her bank and explains that a 40% rent reduction is unaffordable.

They keep negotiating until George and Barb settle on a 50% rent reduction comprised of 30% waived rent and 20% deferred rent. As a result, Barb only has to pay 50% of the bottle shop rent to George during this time and will repay the deferred amount later.

At the same time Barb approaches the lessor of the pub, Venue Holdings, for a rent reduction. Venue Holdings offers to reduce the rent by 100% while the pub is closed but asks Barb to keep paying outgoings during that period. They agree to waive 75% of the rent with the remaining 25% deferred until after the pub reopens for business. In the meantime, Barb continues to pay the outgoings for the pub as required by the lease.

Outgoings as part of rent reduction

Section 15 of the regulation addresses negotiating rent and other conditions. Leases treat outgoings in many different ways, and it is good to adopt a flexible approach when negotiating the rent payable and other conditions during the recovery period.

The regulation's main purpose is to mitigate the effects of COVID-19 on the parties to a lease by giving effect to the good faith leasing principles set out in the National Cabinet mandatory code of conduct - SME commercial leasing principles during COVID-19 (PDF, 235KB).

For these reasons, the Queensland Small Business Commissioner encourages both parties to a lease to consider the following when negotiating rent reductions:

  • Each lease may treat outgoings differently and it is important for a tenant and landlord to address how they wish to treat outgoings when negotiating a rent reduction. However, nothing prevents a landlord and tenant from agreeing to a different way of managing outgoings.
  • If a landlord has benefited from a reduction in any outgoings, the Commissioner considers it as not dealing ‘in good faith’ when the benefit is not passed on to the tenant. However, nothing prevents a landlord and tenant from negotiating a different way of passing on the benefit of a reduction.
  • Outgoings are a condition of the lease that is able to be negotiated as part of a rent reduction. An agreement for a rent reduction between a landlord and tenant may relate to rent alone, and/or rent and outgoings.

Lease agreement disputes

If the parties are unable to successfully reach an agreement for an affected lease, either party may approach the Queensland Small Business Commissioner for assistance and dispute resolution in the form of mediation.

Either party may give notice of a lease dispute to the Commissioner. If the Commissioner is satisfied the dispute is for an affected lease, or a small business lease dispute, mediation will be arranged on behalf of the parties.

Negotiating a different agreement

The tenant and landlord can make a agreement about a rent reduction that is not consistent with the obligations of the regulation. Either the tenant or landlord can seek to negotiate the conditions of such an agreement.

Agreements to reduce rent already in place before 28 May 2020

If a tenant and landlord made a written agreement to reduce rent before 28 May 2020, this agreement can remain in place. However, either party can seek a new agreement if the outcome would be different under the regulation.

Changes to agreements

If a tenant's financial circumstances change further after an agreement has been reached for a variation to the lease, they can make another request to their landlord for a rent reduction. These further financial changes must occur from 29 March 2020 to 30 September 2020.

To negotiate this, the landlord and tenant must follow the same process for agreeing to the initial rent reduction, however the landlord is not required to offer at least 50% of the further rent reduction in the form of a rent waiver.

Rent increases

A landlord of an affected lease must not increase rent between 29 March 2020 and 30 September 2020, unless they agree in writing with the tenant. This does not apply to a retail lease where rent is determined by the tenant's volume of trade.

If the tenant's financial circumstances improve before 30 September 2020, either party can renegotiate an agreement.

Repaying deferred rent

Tenants don't need to pay back deferred rent until after 30 September 2020 (unless the tenant and landlord have agreed otherwise). Repayments must be made by instalments, using a method agreed between the parties, over a period of at least 2 years but no more than 3 years.

Despite the conditions of the lease, the landlord may continue to hold any security deposit until the deferred rent has been paid. However, the landlord must not charge interest or any other fee on deferred rent, unless the tenant doesn't comply with the deferral conditions.

Extending a lease to accommodate deferred rent

If the landlord and tenant of an affected lease have agreed on a rent deferral, the lease can be extended to allow time for rent repayment (up to a maximum of 6 months). Any lease extension must be of terms and conditions that are no less favourable than before 28 May 2020. Read section 17 of the regulation for more information on lease extensions.

Demonstrating financial impact (loss of turnover)

Tenants and landlords must exchange enough information to understand the impact of COVID-19 on each other to enable fair and transparent negotiations. Information shared must be true and accurate, and sufficient to inform the negotiations.

Examples of information that could be shared

Tenants

Information that may be provided by tenants. These are a guide to common examples of information you might share.

  • A statement explaining why the lease is an affected lease
  • Accurate financial information or statements about reduction of turnover of the business carried on at the premises; and (if different) the business overall
    • a statement of COVID-19 restrictions imposed on the business that reasonably affected, or will affect, turnover in 2019–20 financial year
    • the business activity statement/s (BAS) for the relevant month/s during the response period and the BAS for the same month/s in 2019 (or, if you do not submit BAS, a statement containing the equivalent financial information)
    • expenses that have substantially increased (or have been deferred, waived or suspended) due to COVID-19
  • Evidence showing the tenant is a small to medium enterprise (SME) (i.e. that the tenant's turnover did not exceed $50 million in the 2018–19 financial year, or is unlikely to exceed that amount in the 2019–20 financial year)
  • Evidence the tenant's business is eligible for the JobKeeper Payment scheme:
    • Results of the ATO JobKeeper turnover test
    • JobKeeper enrolment information (e.g. receipt from the ATO)
    • Other JobKeeper eligibility information

Note: Eligibility rules 7 and 8 for JobKeeper state you only need to satisfy the fall in turnover test once – at or before the test time, you don't need to test your turnover in the following months or quarters. This does not prevent a landlord from requesting to review decline in turnover or an agreed rent reduction periodically.

  • Information about what steps the tenant has taken to alleviate the financial impact of COVID-19
    • summary of government financial assistance sought and the outcome
    • material provided by a government agency in relation to financial assistance package availability, eligibility or acceptance.

Landlords

Information that may be provided by landlords. If a landlord wants to negotiate a tenant's request, then a landlord should share information to demonstrate their financial situation.

These are a guide to common examples of information you might share.

  • Accurate financial information or statements about the landlord's financial position:
    • a statement of COVID-19 restrictions (if any) imposed on the landlord that reasonably affected, or will affect, their financial position in 2019–20 financial year
    • a statement explaining the costs of owning and maintaining the property
    • the business activity statement/s (BAS) for the relevant month/s during the response period (or, if you do not submit BAS, a statement containing the equivalent financial information)
  • expenses that have substantially increased (or have been deferred, waived or suspended) due to COVID-19.

A landlord or tenant must not share or use any of this information for any reason other than to justify a rent reduction or to negotiate or resolve an eligible lease dispute. The only exception is where it is permitted by Section 19 of the regulation.

Examples of information a party should not request

  • Future cash flow projections
  • Balance sheets, profit and loss or year to date financials
  • The tenant or landlord's bank balance
  • Trust account information
  • Evidence of refusal or ineligibility for government financial assistance packages
  • Financial information to be verified, examined, assured, audited or provided by a third party such as an accountant
  • A letter of comfort or similar from an accountant on the financial information
  • Any onerous documentation requests, especially if they involve paying a fee to produce or access

Making an agreement

Once an agreement is reached, you must record the terms of the rent reduction, and any other conditions, in writing in a variation to the lease agreement or another agreement.

'Another agreement' can be as simple as an exchange of emails. The key things to document include:

  • that the agreement is made under the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020
  • the rent reduction amount (including how much is waived and how much is deferred)
  • what happens with rent that has been deferred (i.e. when repayments start, what the repayments are and how long the tenant has to pay it back)
  • if outgoings are payable – then what will happen with those
  • how long the varied arrangement will last
  • if the agreement is to be reviewed in the future, who is doing that, how and when. What will need to be provided by whom, for the review to occur
  • what happens if someone under the agreement doesn't do something they agreed to do.

Lease agreement dispute resolution

Legally, both the tenant and landlord must cooperate and act reasonably in all discussions and actions associated with COVID-19 related lease arrangements.

If a tenant and landlord cannot come to an agreement, dispute resolution services are available. By law, before starting mediation, the tenant and the landlord must attempt to resolve the dispute themselves.

Either party can contact the Office of the Queensland Small Business Commissioner to discuss the next steps. Learn about mediation assistance through the Office of the Queensland Small Business Commissioner.

A landlord must not commence any court or tribunal proceedings for any of the following from 29 March 2020 to 30 September 2020:

  • evictions
  • termination of leases
  • other prescribed actions as outlined in Section 8 of the regulation on any of the following grounds:
    • failure to pay rent
    • failure to pay outgoings
    • the business not being open for business during the hours required under the lease.

Legal action started before 28 May 2020

Landlords and tenants may need to take different courses of actions depending on when legal proceedings started.

Before 29 March 2020

If a landlord has started legal proceedings against a tenant before 29 March 2020, such as to terminate the lease or to enforce the lease, and later the tenant lodges a dispute notice with the Queensland Small Business Commissioner (QSBC), those legal proceedings mostly can continue and won't be able to go through the mediation process administered by the QSBC.

Between 29 March 2020 and 28 May 2020

If a landlord started legal proceedings or a prescribed action against a tenant with an affected lease between 29 March 2020 and 28 May 2020, such as to terminate the lease or to enforce the lease, those proceedings must be put on hold until after 30 September 2020.

Legal action started after 28 May 2020

If a tenant lodges a dispute notice with the Queensland Small Business Commissioner (QSBC) after 28 May 2020, and later the landlord starts legal proceedings against the tenant, such as to terminate the lease or to enforce the lease, those legal proceedings are mostly put on hold until the mediation process administered by the QSBC is completed.

After 28 May 2020, a landlord must not start legal proceedings or a prescribed action against the tenant, such as to terminate the lease or to enforce the lease. If a landlord starts legal proceedings being a prescribed action against the tenant after this date, the tenant may apply to the Queensland Civil and Administrative Tribunal (QCAT) or the appropriate court for an order requiring the landlord to not take the action.

A landlord may take a prescribed action against the tenant in accordance with an existing order of a court or tribunal.

Retail shop leases

For retail shop leases, if a dispute notice has been lodged with QCAT before 28 May 2020, that retail tenancy dispute resolution process continues.

Retail shop lease disputes on or after 28 May 2020 are dealt with by the QSBC mediation process until 30 September 2020.

Alternative dispute resolution

Landlords and tenants may agree to use an alternative way to resolve disputes. For example, they may decide to use a dispute resolution process mentioned in the lease or agree to appoint an arbitrator if mediation has been unsuccessful.

Lease agreements expiring between 29 March 2020 and 30 September 2020

If a lease expired before 28 May 2020, it is not considered an affected lease (see section 5 (1) b of the regulation).

If an affected lease expires between 28 May 2020 and 30 September 2020, a landlord must not take a prescribed action such as making a claim on a bank guarantee or security deposit for unpaid rent between that period.

An affected lease expiring between 28 May 2020 and 30 September 2020 can be extended if the landlord and tenant have agreed on a deferral of rent. A lease extension must be of terms and conditions that are no less favourable than before 28 May 2020. Read section 17 of the regulation for more information on lease extensions.

Non-COVID-19 related lease breaches

A landlord can still evict a tenant (or take another prescribed action) for reasons not related to the effects of the COVID-19 emergency. This could include if a tenant breaches their lease by:

  • being behind in rent before 29 March 2020
  • wilfully damaging the property.

Reduction of landlord's services

If a tenant under an affected lease is unable to operate their business at the premises for any time between 29 March 2020 and 30 September 2020 because of the COVID-19 emergency, the landlord may choose to cease or reduce any service at the premises. This reduction in service must be reasonable in the circumstances and in response to a reasonable request of the tenant.

Dispute resolution and mediation for non-affected leases

Tenants and landlords with an eligible small business lease not considered an affected lease can still request assistance and mediation services from the Queensland Small Business Commissioner.

To access mediation, an eligible lease is considered to be a lease for carrying on a business that employs less than 20 full time staff (or the equivalent).

For example, a business with an eligible lease can access mediation if they:

  • employ 8 full time equivalent staff
  • have experienced a 25% decline in turnover
  • are not eligible for the JobKeeper Payment scheme.

The tenant and landlord must attempt to resolve the dispute themselves first. Both parties must cooperate and act reasonably in all discussions and actions around the dispute.