South Australian COVID-19 commercial leasing legislation – an update.
Since the outbreak of COVID-19, the guidelines and legislation in place with respect to commercial leasing across Australia have been the subject of significant conjecture.
Whilst the Federal government’s National Cabinet Mandatory Code of Conduct—SME Commercial Leasing Principles During COVID-19 (Code) and the South Australian government’s COVID-19 Emergency Response Act 2020 (Act) (which we have summarised here) provided an initial framework for managing commercial lease arrangements, a number of key concerns and questions remained as to the practical application of these instruments.
What has ultimately been legislated in South Australia in fact introduces a number of changes, to both the Code and the Act, in an attempt to clarify some of the ongoing queries raised by tenants, landlords and property professionals alike and to allow for further regulations to be passed, if required.
These further changes take the form of two further pieces of legislation enacted by the South Australian government, namely the COVID-19 Emergency Response (Further Measures) Amendment Act 2020 (Further Measures Act) and the accompanying COVID-19 Emergency Response (Commercial Leases No. 2) Regulations 2020 (Regulations).
Further Measures Act
The Further Measures Act makes a number of wholesale amendments to the Act, in particular, to allow for future changes and updates to be made in an ongoing and responsive fashion. This change ensures regulations and legislation can stay up to date and reflective of present COVID-19 circumstances and allows for the mitigation of adverse impacts which may be presently unforeseeable.
The Regulations are the first example of legislation enacted under the Further Measures Act, to govern commercial lease arrangements in SA. In effect, the Further Measures Act provides the SA government with the specific power to enact the Regulations and the Regulations themselves contain the specific provisions as they relate to the management of commercial lease arrangements during the COVID-19 pandemic.
Specifically, the clear objectives of the Regulations can be found at section 4:
- to implement temporary measures to apply to parties to certain commercial leases related to circumstances brought about by the COVID-19 pandemic; and
- to provide for mechanisms to resolve disputes concerning those leases.
Critical take-away messages from the Regulations include:
1. The Code has not been wholly adopted in South Australia
Some controversial and important parts of the Code have not been legislated in South Australia, specifically:
- there are no specific obligations for a defined portion of rent relief offered to a lessee to be deferred or waived;
- any agreed rent relief need not be a proportionate reduction in line with a lessee’s decrease in turnover, i.e. a 40% decrease in turnover does not correspond directly to 40% relief for the lessee; and
- any rent repayment period for deferred rent no longer requires a minimum repayment term of 24 months.
2. Obligation of parties to commercial leases to negotiate in good faith
Parties to a lease must make a genuine attempt to negotiate in good faith the rent payable under the terms of the lease during the period from 30 March 2020 to 30 September 2020 (prescribed period), considering the economic impact on both parties to the lease. The obligation to act in good faith applies to all commercial lease arrangements, irrespective of the economic impact of COVID-19 on any specific party to the lease.
3. Prohibitions and restrictions relating to commercial leases
During the prescribed period, the lessor must not take a “prescribed action” against an “affected lessee” on the grounds of a breach of the lease as a result of failure to pay rent or outgoings, or the business operating under the lease not being open during the hours specified in the lease (if any).
An “affected lessee” is a lessee who is either eligible for, or receiving, the Jobkeeper wage subsidy in respect of the lessee’s business and the turnover of the business conducted by the lessee at the premises the subject of the commercial lease was less than $50 million in the relevant year (also taken to include the turnover of a group of companies, when the lessee is a corporation that is a member of a group of companies).
A “prescribed action” largely relates to taking action to terminate a lease and subsequent recovery/ re-entry by the lessor
Further, where the lessee is an affected lessee, the lessor is restricted from:
- increasing the rent payable under the lease (unless mutually agreed); and
- recovering land tax payable under the lease, if the lessor has received, or will receive, land tax relief under the South Australian government’s emergency $50m land tax relief scheme.
4. Dispute resolution
Broadly, the Regulations require that should a dispute arise in respect of the terms of an agreement (or lack thereof) related to rent relief, or the application of the Regulations or other COVID-19 legislation, the parties must first apply to the Small Business Commissioner for a mediation of the matter, and if not satisfied with the result, may apply to Magistrates Court thereafter for a determination.
Whilst this is not meant as an exhaustive summary of the changes to arise from the Further Measures Act or the Regulations, the critical message remains that parties to a lease should negotiate in good faith with regards to rent payable under a commercial lease during the prescribed period.
If you require further clarification of the issues addressed in this article, would like assistance in respect of negotiating rent relief, or general advice in resolving a commercial lease dispute, please contact the team at Eckermann Lawyers.