Changes to Commercial Leases during the COVID-19 Pandemic in South Australia

by Julia Zisos

On 7 April 2020, the National Cabinet announced that state and territory governments would implement a mandatory Code of Conduct (Code) for the purpose of imposing a set of principles to be applied to commercial tenancies.

 

In response to the Code, the COVID-19 Emergency Response Act 2020 (SA) (Act) was assented to on 9 April 2020. However, on 15 May 2020 the COVID-19 Emergency Response (Further Measures) Amendment Act 2020 (Amendment Act) was assented to, which repealed s 7 of the Act (containing all of the measures relating to commercial leases), replacing it with a power for the Governor to make regulations in relation to commercial leases. The COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (SA) (Regulations) were then introduced under s 7 of the Act.

 

The Property Council of Australia considers that the Amendment Act and the Regulations are the most favourable code in Australia, as they take into account the landlord’s ability to grant relief, and the effect of the COVID-19 pandemic on both the landlord and the tenant.

Code

The Code is intended to complement any state legislation that has since been enacted, and lists overarching principles that are aimed at achieving good faith discussions between the landlord and the tenant. Some of the most significant principles include that:

  • landlords must not terminate a lease due to non-payment of rent during the COVID-19 pandemic period, or a reasonable subsequent recovery period;
  • landlords must offer tenants proportionate reductions in rent payable as waivers or deferrals of up to 100% of the amount ordinarily payable, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period;
  • in the event that rent is reduced, a rental waiver must constitute no less than 50% of the total reduction in rent payable (i.e. where rent is reduced by 30%, 15% of this must be by waiver, and the remaining 15% must be deferred);
  • any reduction in statutory charges or insurance will be passed on to the tenant in the appropriate proportion;
  • landlords must not draw on a tenant’s security (including a cash bond, bank guarantee or personal guarantee) for the non-payment of rent during the COVID-19 pandemic period and/or a reasonable subsequent recovery period; and
  • landlords agree to a freeze on rent increases for the duration of the COVID-19 pandemic period and a reasonable subsequent recovery period.

The Code came into effect in South Australia on 7 April 2020, and continues for the period during which the JobKeeper programme remains operational, that is (currently) until 27 September 2020.

The Code has not been amended since its introduction, and should be used as a reference point where the legislation does not provide a clear answer. The Code itself is not binding on parties to a lease. It is intended to complement the legislation in each State that does bind the parties.

Regulations

The Regulations operate retrospectively on and from 30 March 2020. The period for which the Regulations will be operational, defined as the prescribed period, is from 30 March 2020 to 30 September 2020. A tenant will fall under the operation of the Regulations, and be an affected lessee, where:

  • they are suffering financial hardship as a result of the COVID-19 pandemic (where the tenant is eligible for, or receiving JobKeeper in respect of the business of the tenant); and
  • the turnover in a relevant year (being either the 2018/19 financial year, or a 12 month or less period as determined by the Magistrates Court or the Attorney-General) is less than $50m.

The turnover test takes into account franchises (where the turnover will only include amounts derived from the business conducted at the premises the subject of the lease) and corporate groups (where the turnover will be the turnover of the whole group (which would necessarily exempt large corporate groups)). This provides for a year-on-year comparison of the effect of the COVID-19 pandemic on the turnover of the tenant. Internet sales will be included in the calculation of turnover. It has been suggested where landlords are considering granting relief to tenants, that the tenant’s eligibility for the relief be assessed on a monthly basis. It should also be noted that some landlords may not be entitled to turnover information of tenants under the Retail and Commercial Leases Act 1995 (SA), and this information may need to be provided voluntarily by the tenants.

 

The Regulations apply to commercial leases during the prescribed period, except for a lease that was entered into after 30 March 2020, unless that lease is an extension or renewal of an existing lease that is on the same or substantially similar terms as the existing lease. As such, the Regulations do not apply to new leases.

 

Regulation 6 requires the parties to negotiate in good faith, as per the Code, having regard to:

  • the economic impacts of the COVID-19 pandemic on the parties (not just the tenant);
  • the provisions of the Act and the Regulations; and
  • the provisions of the Code.

 

As a result, while the Code is not binding on the parties, they should still take into account the provisions of the Code when negotiating. Where a party has taken into account these provisions, they will be looked on more favourably by the Court.

 

A landlord cannot take any prescribed action (as listed below) against a tenant on the ground of breach of the lease during the prescribed period, for:

  • failure to pay rent;
  • failure to pay outgoings; or
  • the business under the lease not being open during the hours specified in the lease.

 

Prescribed action is defined as taking action or seeking orders, or issuing proceedings for any of the following:

(a) eviction of the tenant;

(b) exercising a right of re-entry;

(c) recovery of land;

(d) distraint of goods;

(e) forfeiture;

(f) damages;

(g) requiring a payment of interest on unpaid rent otherwise payable by a tenant;

(h) recovery of the whole or part of a security bond under a commercial lease;

(i) performance of obligations by the tenant or any other person pursuant to a guarantee;

(j) possession;

(k) termination of a commercial lease; or

(l) any other remedy otherwise available to a landlord against a tenant at common law or under the laws of South Australia.

 

The circumstances in which a landlord is prevented from taking any prescribed action are limited to those listed above (i.e. failure to pay rent, failure to pay outgoings, or not being open during the hours described in the lease). Therefore, a landlord is not prevented from taking any prescribed action in other circumstances such as any other breach of the lease, or any make good obligations of the tenant. Further, as opposed to the provisions of the Code, subparagraph (h) of the definition of prescribed action only prevents a landlord from recovering a security bond, and arguably does not prevent a landlord from calling up a bank guarantee, which is far more common with commercial tenants. Any action to recover a bank guarantee during the prescribed period should be carefully considered by a landlord, and the landlord should always take into account their good faith obligations.

 

A landlord cannot require the payment or reimbursement of land tax unless permitted under the lease. Regulation 7(7) provides that where the landlord has been granted a waiver of land tax or relief, the landlord must pass on the benefit of the waiver or relief in the form of a waiver of rent payable. Therefore where a landlord has received relief (but not a waiver) from payment of land tax, this must be waived in relation to the tenant, even where the landlord will be required to pay that land tax at a later date. The guidance provided by RevenueSA shows that landlords who pass on rent relief (by way of waiver) to tenants who have been affected by the COVID-19 pandemic will be eligible for land tax relief of up to 25%. Evidence will need to be provided to RevenueSA in order to obtain the relief.

 

The Regulations give the Magistrates Court broad powers to vary the terms of the lease and payment of rent. If the Court orders that rent is deferred, the Court may also order that the lease is extended for the period for which the rent is deferred.

 

If the Court makes an order granting rent relief, at least 50% of the relief must be in the form of a waiver. It is important to note that the Regulations require the Court to take into account not only the circumstances of the tenant, but also the circumstances of the landlord. As such, where a landlord has negotiated in good faith taking into account their own circumstances, this will be looked on favourably by the Court.

 

Whilst the Regulations have now been operational for almost two months, they have raised significant issues and have resulted in a large number of tenants and landlords seeking advice as to the operation of the Regulations and the Code. We consider that although the Regulations, together with the Code, will provide guidance to both tenants and landlords, it will be up to the parties to determine what actions are in both of their best interests, considering the circumstances.

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