Changes to Leasing Arrangements as a Result of COVID—19
17 April 2020
Councils need to be aware of recent changes to their rights and obligations as landlords under certain leases as a result of measures introduced by the South Australian government to assist businesses in the face of the COVID-19 pandemic.
The South Australian parliament recently passed the COVID-19 Emergency Response Act 2020 (Act) and yesterday, introduced the COVID-19 Emergency Response (Commercial Leases) Regulations 2020 (Regulations). This Alert addresses the effect of the Act and the Regulations on commercial leases for council landlords.
Section 7 of the Act modifies the provisions of ‘commercial leases’ for the ‘prescribed period’ so that a landlord cannot take certain actions against a lessee that is suffering financial hardship as a result of the COVID-19 pandemic.
The Act gives effect to the leasing ‘eviction moratorium’ previously announced by the Prime Minister and, in conjunction with the Regulations, incorporates certain principles contained in the ‘Mandatory Code of Conduct’ adopted by the National Cabinet for commercial leasing during COVID-19 (“the Code”).
As at the date of this Alert, the Code, however, has not been adopted in full by the South Australian parliament and as such, only the principles of the Code that have been incorporated in the Act and Regulations apply here in South Australia.
For the purposes of the Act, a commercial lease is broadly defined to capture any agreement that grants a right of occupancy (exclusive or otherwise) over premises for carrying on a business, and (unsurprisingly) includes a ‘retail shop lease’ as defined in the Retail and Commercial Leases Act 1995 (RCLA). The definition captures leases and licences over many Council facilities including, for example, sporting clubrooms which include a kiosk, or a community hall with paid tea and coffee facilities.
The prescribed period is the period commencing 30 March 2020 until the date that section 7 expires as fixed by the Minister by notice in the Gazette pursuant to a section 6 of the Act. The latest date that may be fixed for this purpose is the earlier of 9 October 2020 or, the date on which all of the relevant directions from the government in relation to COVID-19 have ceased.
Financial hardship as a result of the COVID-19 pandemic
The Regulations define when a lessee will be considered to be suffering financial hardship as a result of the COVID-19 pandemic. In short, this occurs where the lessee is eligible for, or receiving the JobKeeper payment.
Effect on commercial leases
If a Council is the landlord under a commercial lease, the Act now prohibits the Council from taking ’prescribed actions’ if the lessee is suffering financial hardship as a result of the pandemic and fails to pay rent, pay outgoings, or operate the business from the premises during the hours required in the lease. The prescribed actions include issuing proceedings in court for any of the following:
- eviction of the lessee from the premises or termination of the lease;
- exercising a right of re-entry to the premises;
- recovery of land;
- distraint of goods or forfeiture;
- requiring a payment of interest on unpaid rent otherwise payable by the lessee;
- recovery of the whole or part of a security bond under the commercial lease;
- performance of obligations by the lessee or any other person pursuant to a guarantee under the lease; and
- any other remedy otherwise available to a lessor against a lessee at common law or under the law of South Australia.
In addition, the Act:
- stipulates that unless the parties agree otherwise, the rent cannot be increased (except in accordance with a turnover rent provision) during the prescribed period if the lessee is suffering financial hardship; and
- provides that any act or omission of a lessee which is required under the laws of South Australia in response to the pandemic (for example, the closure of premises pursuant to the Emergency Management (Non-Essential Business and Other Activities No 4)(COVID-19) Direction 2020 or its various iterations) will not constitute a breach of the lease.
At this time, there is no obligation on a lessor to decrease or defer rent payable under the lease in accordance with the principles set out in the Code or otherwise. Accordingly, whilst rent can still be demanded by the lessor, failure to pay cannot be enforced if the lessee is suffering financial hardship.
We are aware that a number of councils are being approached by their lessees seeking concessions in relation to their leases. In order to understand its position, councils should seek evidence from these lessees as to whether or not they are receiving or eligible for the Job Keeper payment.
Either way, councils can offer or negotiate with a lessee a reduction or deferral of rent (in whole or part) for a specified period or a combination of both. In doing so, councils should take into account and ensure its actions are consistent with any financial hardship or (relevant) economic stimulus policy that has been adopted by the Council (we recommend that hardship policies adopted by councils are expanded to address the granting of relief in connection with commercial leases).
Subject to applicable council policies, we recommend that councils consider seeking disclosure from lessee’s that may be seeking concessions regarding their financial position (including turnover figures) to assist in assessing:
- whether the lessee is entitled to the protections under the Act; and
- whether the degree of financial hardship suffered warrants Council agreeing to a reduction of or deferral in rent.
It is important that any agreement regarding rent reduction or deferral is adequately documented.
Whilst the provision of rent reduction or deferrals is not currently mandated in South Australia, the position may change, particularly if the South Australian Government takes steps to adopt the Code in full. In this case, it will be necessary for councils to reassess their position and comply with any applicable requirements, including rent reductions and/or deferrals. We will continue to monitor this space and will keep you informed.
If you would like assistance in managing leasing arrangements or in reviewing hardship policies to address the above, please contact: