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COVID-19: The South Australian response to the Commercial Leasing Code of Conduct

In response to the COVID-19 pandemic, the South Australian Government has now enacted the COVID‑19 Emergency Response Act 2020 (“Act”) and the COVID-19 Emergency Response (Commercial Leases) Regulations 2020 (“Regulations”). The Act applies to commercial leases and implements some but not all of the measures announced by the Australian Government under the mandatory leasing Code of Conduct (“Code”).

Code of Conduct

At the date of writing, the Code has not been enacted into law in South Australia. You can read our detailed analysis of the Code here.

Notwithstanding this, the Act, under Section 7, does incorporate key principles from the Code including prohibitions on landlords evicting tenants, terminating leases, increasing rent and calling on security.

However, the Act currently does not implement the following principles set out in the Code:

  • requirement for landlords to grant tenants proportionate rent relief in the form of waivers and deferrals and timeframes for repayment of deferred rental;
  • concept of the reasonable recovery period;
  • obligation on tenants to honour their lease agreements and the inability to terminate; and
  • protection for landlords whose tenants have materially failed to abide by the substantive terms of their lease.

It remains to be seen whether the Act or the Regulations will be amended to incorporate any of the above principles set out in the Code. We will continue to monitor the situation and provide updates but at the time of writing it is only those provisions of the Code that have been incorporated into the Act and the Regulations that currently apply.

Application and Key Concepts

Section 7 of the Act applies to all “commercial leases” and prevents landlords from taking “prescribed actions” during the “prescribed period” where the tenant is suffering “financial hardship” due to COVID-19.

Commercial Leases

Commercial leases are defined to include all leases under the Retail and Commercial Leases Act 1995 (SA), the Landlord and Tenant Act 1936 (SA) or any other agreement whereby a person is granted for value the right to occupy a premises for business purposes (“Commercial Leases”).

Prescribed Period

The provisions relating to Commercial Leases under Section 7 of the Act took effect on 30 March 2020 (backdated prior to the Act’s commencement). They expire on the date fixed by the Minister (by notice in the Gazette). The latest date that may be fixed by the Minister is the earlier of the date that all relevant declarations relating to the COVID-19 pandemic within South Australia have ceased or 8 October 2020 (“Prescribed Period”).

Financial Hardship

Financial hardship is defined in the Regulations. The Regulations implement the principle from the Code that a tenant is deemed to be suffering financial hardship as a result of the COVID-19 pandemic if they are eligible for, or receiving, a JobKeeper payment.

Interestingly unlike the Code, to be suffering financial hardship the Act does not prescribe any upper annual turnover limit requiring the tenant’s annual turnover to be no more than $50m.

There is also a mechanism for the Small Business Commissioner (“SBC”) to make determinations as to whether a tenant is suffering financial hardship (refer below). This may be relevant in circumstances where the tenant might not be eligible for, or not receiving, a JobKeeper payment but otherwise might be able to evidence financial hardship.

Prohibition on Prescribed Actions

If the above criteria are satisfied, that is a tenant under a Commercial Lease is suffering financial hardship due to COVID-19, then the landlord cannot take certain action (“Prescribed Action”) against the tenant for a breach of the lease during the Prescribed Period, including in relation to:

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

The prohibited Prescribed Action includes:

  • evicting the tenant from the premises or terminating the lease;
  • exercising a right of re-entry, carrying out a distraint or taking possession;
  • calling on security held (e.g. bank guarantee); or
  • demanding performance by anyone guaranteeing the tenant’s obligations under the lease.

In our view there is a need for further clarity in relation to Section 7(3) of the Act. Specifically whether a breach by a tenant that occurred prior to the commencement of Section 7 of the Act and other than as a result of financial hardship caused by COVID-19, prevents a landlord from taking Prescribed Action during the Prescribed Period.

For example, it is unclear on our reading of the Act whether a landlord is able to call on a bank guarantee after 30 March 2020 and during the Prescribed Period, on the basis of a tenant’s breach arising from a failure to pay rent for an earlier period (i.e. rental arrears for any period up to and including 29 March 2020).

However as the Act is essentially for the benefit of tenants, we would recommend that landlords do not take Prescribed Action without obtaining specific advice.

Rent

Unless agreed between the parties, rent payable under Commercial Leases (other than turnover rent) cannot be increased if the tenant is suffering financial hardship due to COVID-19.

As noted above, at this stage the Act does not implement any of the specific proportionate rent relief measures set out in the Code. That is, there is no obligation on the landlord to decrease rent (by way of a waiver) or defer rent based on the tenant’s reduction in turnover caused by COVID-19.

Rent can still be demanded by landlords in the ordinary course, but during the Prescribed Period the failure by tenants to pay rent cannot be enforced by landlords.

In our view, in certain circumstances, this may result in parties seeking to reach commercial outcomes in relation to the payment of rent during the Prescribed Period, notwithstanding that the Act does not set out a formal mechanism for this. If this is the case, to assist the parties in negotiating revised rental arrangements and assessing the impact of COVID-19, it is incumbent on tenants to disclose business turnover and other financial information to their landlords.

Land Tax

Landlords cannot require tenants to pay land tax in relation to Commercial Leases if the tenant is suffering financial hardship due to COVID-19. In many instances, particularly where the Retail and Commercial Leases Act 1995 (SA) applies, landlords may already be prohibited from recovering land tax from their tenants.

Tenant Acts or Omissions

Any act/omission of a tenant required under the law in response to the COVID-19 pandemic (e.g. not trading from the premises due to the Government’s forced closure of certain retailers) will not equate to a breach and the landlord will not be able to terminate the lease or take any action for this reason.

Role of Small Business Commissioner

Determination of Financial Hardship

The Act prescribes a mechanism whereby the SBC, on application by either party to a Commercial Lease, can make a determination as to whether a tenant is suffering financial hardship due to COVID-19. The Regulations provide that the SBC must have regard to certain matters in determining if a tenant is suffering financial hardship including:

  • whether the tenant is eligible for, or receiving, a JobKeeper payment in relation to its business; and
  • any reduction in turnover of the business of the tenant (verified by financial records or statements from the tenant) during a specified period as compared with another specified period as determined by the SBC.

In our view, it is unclear whether the SBC will require the tenant to provide audited financial records or statements or whether statements generated through an accounting system will be acceptable.

Mediation

The SBC can also mediate any dispute regarding issues relating to COVID-19, the lease or the occupation/business run from the commercial premises. Whilst not specified in the Act, this could include mediation in relation to rent relief measures.

Confidentiality

The Act states that a person cannot disclose confidential information regarding business processes/financial information (including turnover) obtained in connection with Section 7 of the Act unless it receives prior authorisation or consent, the disclosure is authorised by the SBC, or it is for legal proceedings or to a police officer.

Need Assistance?

If you have any specific questions in relation to the COVID-19 Emergency Response Act 2020 or the Code, please do not hesitate to contact Sam Richardson or a member of our team – Contact Us.

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