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COVID-19 Commercial Leasing in South Australia – another round of changes!

The South Australian Government has made further changes to the COVID-19 Emergency Response Act 2020 (“Act”) and also introduced new regulations - the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (“New Regulations”). The New Regulations have particular importance to commercial leasing and operate to implement certain principles set out in the National Cabinet Mandatory Code of Conduct for Commercial Leasing (“Code”) in South Australia.

How did we get here?

Before analysing the changes to the Act and the New Regulations, it is worth considering the sequences of events that led to these further changes.

On 6 April 2020, the Code was released by the National Cabinet. For a summary please refer to our previous article: "COVID-19: What Landlords and Tenants Need to Know"

On 9 April 2020, the South Australian Government introduced the Act and on 16 April 2020, the COVID-19 Emergency Response (Commercial Leases) Regulations 2020 (Initial Regulations”). For a summary please refer to our previous article: "COVID-19: The South Australian response to the Commercial Leasing Code of Conduct"

Changes to the Act and the Regulations

On 15 May 2020, the Act was amended when the COVID-19 Emergency Response (Further Measures) Amendment Bill 2020 (“Bill”) was assented to. On the same day the New Regulations came into force and the Initial Regulations ceased to apply.

Section 7 of the Act previously contained substantive provisions setting out the specific rights and obligations of lessors and lessees under a commercial lease during the COVID-19 pandemic. This section has been amended and now contains broad provisions for regulations to be created to deal with these rights and obligations. The New Regulations contain the substantive provisions that were previously contained in the Act.

We suspect this “switch” was made so that if further changes are needed as the status of the COVID-19 pandemic evolves, they can be swiftly implemented by way of new regulations via Ministerial consent, rather than the more elaborate parliamentary process required to amend the Act.

Section 7 of the Act and the New Regulations apply from 30 March and end on 30 September 2020 (“Prescribed Period”).

The New Regulations

In addition to replicating the substantive provisions that were previously contained in the Act, the New Regulations also implement additional principles set out in the Code. Further details regarding these changes are set out below.

Good Faith Negotiations

The New Regulations require all parties to a commercial lease to make a genuine attempt at negotiating in good faith the rent payable and other terms to apply to their commercial lease during the Prescribed Period.

Whilst “good faith” is not defined in the Act or the New Regulations, we consider that what is required is for the parties to exercise their rights for legitimate purposes and to conduct themselves honestly. To negotiate in good faith lessees should, if requested by their lessor, provide BAS statements, turnover sales and information relating to their JobKeeper payments and business insurance. The Small Business Commissioner (“SBC”) has produced a “guidance note” that confirms this.

Have regard to…

In negotiating in good faith, the parties must “have regard to” the economic impacts of COVID-19 on all parties to the lease and the provisions of the Act, the New Regulations and the Code.

In our view the requirement to “have regard to” should be considered in a broad context.

We do not consider that it places a prescriptive requirement on the parties to comply with the Code in its entirety. That is, we do not consider this requires rent relief to be granted to a lessee strictly proportionate to the lessee’s reduction in turnover, rather it requires the parties to consider the principles set out in the Code when negotiating in good faith. Lessors should however note that if the matter proceeds to Court (refer below), the Court must have regard to a lessee’s reduction in turnover during the Prescribed Period.

Lessor’s financial position

The New Regulations require the parties to consider whether the lessor is suffering financially from the effects of COVID-19 when conducting negotiations. This requirement is not set out in the Code and we consider this to be especially relevant for smaller lessors who may be receiving minimum or no support from their financier and who may have entered into a commercial lease with a larger “corporate” lessee.

Affected Lessees

Under the New Regulations, a lessee is an affected lessee if they can establish that they are suffering financial hardship as a result of the COVID-19 pandemic and if their turnover in the relevant year (e.g. FY18/19) was less than $50 million.

The definition of “affected lessees” is important as lessors are prohibited from taking prescribed action against an affected lessee on grounds of a breach of the lease during the Prescribed Period (refer below).

Turnover threshold

The introduction of the turnover threshold is noteworthy as the Act and the Initial Regulations did not include this limitation. Previously, all lessees suffering financial hardship as a result of the COVID-19 pandemic were afforded protection. Lessors are no longer prohibited from taking enforcement action against a tenant with a turnover of $50 million or more.

Whilst there is no definition of turnover, the New Regulations confirm that turnover includes turnover that is derived from Internet sales. It remains to be seen how broadly this will be interpreted. Questions arise as to whether it will include all Internet sales or only sales dispatched from or collected from the premises (i.e. via click and collect).

Deemed financial hardship

If a lessee is eligible for or receiving JobKeeper payments they will be deemed to be suffering financial hardship. As the effects of the COVID-19 pandemic evolve, we recommend that lessors continue to request information from lessees on a regular basis (fortnightly or at least monthly) to verify ongoing eligibility and receipt of JobKeeper payments.

Prescribed action

Lessors are still prohibited from taking prescribed action against an affected lessee on grounds of a breach of the lease during the Prescribed Period (e.g. evicting lessees, re-entry, distraint of goods, recovery of a security bond, requiring performance under a personal guarantee or terminating the lease).

The wording in Regulation 7(1) of the New Regulations is in essence the same as the wording that was previously set out in clause 7(3) of the Act. Our view remains that there is uncertainty as to whether lessors can take prescribed action against an affected lessee for breaches of the lease that occurred before the Prescribed Period, for example, in relation to arrears that were incurred before 30 March 2020. Accordingly we recommend that specific legal advice is sought in relation to the particular lease before any prescribed action is taken.

Enforcing Breaches of Re-negotiated terms

The New Regulations have clarified that a lessor can only enforce a failure to pay reduced rent during the Prescribed Period if it has been agreed following mediation with the SBC or pursuant to a Court determination. A reduction in rent agreed to by the parties during good faith negotiations cannot otherwise be enforced during the Prescribed Period.

We consider this to be problematic for lessors. Lessors may look to negotiate on the basis that the parties enter into a new lease (and surrender the existing lease) should the parties be able to reach agreement on revised terms. This would enable the lessor to enforce the terms of the new lease (refer below).

New vs Existing Leases

The New Regulations apply to existing commercial leases during the Prescribed Period and to any extension/renewal of an existing lease if it is on the same or substantially similar terms as the existing lease.

The phrase ”substantially similar terms” is not defined in the Act or the New Regulations. This may cause confusion or disputes to arise because if an existing lease is renewed but the terms are not substantially similar to the terms of the existing lease, then the New Regulations will not apply. This will enable the lessor to enforce the terms of the renewed lease.

The New Regulations also do not apply to new leases entered into after 30 March 2020.

Mediation & Court

The New Regulations provide a mechanism for the resolution of disputes.

Mediation

A lessor, an affected lessee or a lessee claiming to be an affected lessee can apply to the SBC for mediation of a “relevant dispute”. This is defined in an extremely broad manner.

If mediation successfully resolves the issues between the parties, usually a legally binding settlement agreement would be drawn up and executed by the parties.

If mediation is unsuccessful, then the SBC must issue the parties with a certificate. The certificate will confirm the mediation has failed or was not reasonable or a party refused to participate in the mediation / did not participate in good faith (“Certificate”).

Whilst there is no prohibition on a party taking Court action after receiving a Certificate, in circumstances where the party did not participate in the mediation or did not participate in good faith, we expect that such conduct would not be looked upon favourably by the Court.

Court proceedings

A party may only issue proceedings in the Magistrates Court for a determination of the relevant dispute if the party has been issued with a Certificate. Any lessee that is not or is not claiming to be an affected lessee cannot pursue Court proceedings or mediation pursuant to the New Regulations.

The Court may make wide ranging orders including:

  • Deferred rent - the maximum period the Court can prescribe for payment of deferred rent is 24 months after the date the Court makes its determination. This is distinct from the Code, which prescribes a minimum period of 24 months. Whilst this timeframe is only applicable in relation to an order made by the Court, it may assist lessors in negotiating rent relief with affected lessees.
  • Rental waivers - if the Court determines that rent relief is warranted, the Court must order that at least 50% of the rent relief is a rent waiver. Therefore, although there is no prescriptive obligation under the Act or the New Regulations for lessors to give rent relief, if the dispute goes to Court, the lessor may be at risk of a more onerous rent relief arrangement than if they had resolved the matter with the lessee direct.

Need Assistance?

If you have any specific questions in relation to the Regulations or the Code, please do not hesitate to contact a member of our Property Team – Contact Us.

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This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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