Commercial Tenancy Provisions
The South Australia COVID-19 Emergency Response Bill 2020 (“Bill”) was enacted on Thursday 9 April 2020 in response to the National Cabinet’s Mandatory Code of Conduct.
The purpose of the Mandatory Code of Conduct document was to agree in principle a consistent way for the treatment of commercial leases across the country, leaving it to each state to independently legislate these principles.
A summary of the application of the code are as follows:
- The Code applies to tenants suffering financial stress or hardship (defined term below) as a result of the Covid-19 pandemic as defined by their eligibility for the Jobseeker program (that is, tenants with an annual turnover of up to $50 million).
- In respect of franchises, the $50 million threshold will be applied at the franchisee level.
- In respect of corporate retail groups, the $50 million threshold will be applied at the group level.
There are some common principles that the code enforces between Lessors and lessee’s which includes:
- Lessors and Lessees must act in good faith and share a common interest during the pandemic period.
- Lessors and Lessees will be required to discuss their relevant issues, negotiate temporary leasing arrangements and work toward achieving mutual outcomes.
- Lessors and Lessees will act in an open, honest and transparent manner and provide each party sufficient and accurate information within the context of negotiations
- Arrangements will be proportionate and appropriate based on the impact of the pandemic period.
What are your obligations as a lessor?
Inability to take prescribed action
If a lessee is suffering financial hardship, a lessor cannot take any prescribed action (definition click here) against the lessee on the grounds of a breach of the lease as a result of:
- A failure to pay rent OR
- Failure to pay outgoings OR
- Business not being open for business during the hours specified in the lease OR
- Any other act or omission of a kind prescribed by the regulations.
The Bill goes one step further to suspend any prescribed action or lease provisions contrary to these rules that have been taken or commenced, but not yet completed or finalized, by the lessor against the lessee. These will be taken to be stayed or suspended until the end of the prescribed period (which, for now appears to be 6 months).
No rent increase
Unless otherwise agreed, rent payable under a commercial lease must not be increased during this prescribed period (if the lessee is suffering financial hardship as a result of the Covid-19 pandemic) unless rent or a component of rent is determined by reference to turnover.
Cannot recover land tax
The lessor must not require a lessee (who is suffering financial hardship) to pay land tax or reimburse the lessor for payment of land tax during the relevant period.
Negotiation of a rent reduction
Under the National Cabinet’s Mandatory Code of Conduct, it is understood that a lessor and lessee must begin the preliminary discussions on a rental reduction/waiver if a lessee is experiencing financial hardship as a result of the COVID-19 pandemic.
Landlords must offer lessee’s ‘proportionate’ (defined term) reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable based on the reduction in the lessee’s trade during the period impacted.
As a minimum, 50% of the qualifying lessee’s rent reduction must be represented by a rent free/rent waiver for the period. As an example, if the lessee’s revenue has fallen by 30%, then a minimum 15% must be represented as a rent free/rent waiver and the remainder as a rent deferral.
Up to 50% of the rent reduction can be negotiated as a rent deferral which is to be amortised over the balance of the lease term or at least 24 months as negotiated between the two parties.
No fees, interest or other charges can be applied in respect of these waived and deferred rental reductions.
Opportunity to extend the lease
It is expected that if a lessee seeks an extension to the lease equivalent to the rent waiver and/or rent deferral period, that this be granted by the landlord in order to allow the lessee additional time to trade during the recovery period.
Passing on of Benefits
The Landlord should seek to pass on any reduction in statutory charges (land tax, rates etc) or insurance to the tenant in the appropriate portion applicable under the terms of the lease
Landlords must not during the prescribed period drawdown on any security (bank guarantees, personal guarantees, cash bond etc) for non-payment of the rent.
What are your obligations as a lessee?
The lessees are expected to remain committed to the terms of their lease, including amendments to the rental agreements as negotiated under the Code of Conduct.
Lessees are expected to ‘open up’ their books in order to show they have experienced financial hardship.
If the lessees meet the eligibility of the Job Keeper scheme, they will automatically be deemed to be experiencing financial hardship for the purposes of these rules.
The Bill states that an act or omission of a lessee in response to the COVID-19 pandemic:
- Will not amount to breach of a commercial lease and
- Will not constitute grounds for termination of the lease.
Both the lessor and lessee may apply to the Small Business Commissioner in South Australia for:
- Mediation of a dispute as to whether the lessee is suffering financial hardship or
- Determination as to whether the lessee is suffering financial hardship.
A right to appeal the determination in point 2 above will lie with the Magistrates Court.
The application for mediation to the Small Business Commissioner can also arise to other issues including the lease itself, the occupation of the premise or business being conducted at the premise.
It is noted that lessors and lessees must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.
In any event, both parties will need to strike a balance between what they must do and what the spirit of the Code is asking them to do.
It is advised that both parties document any arrangements that is agreed upon where possible.
Residential Tenancy Provisions
The South Australia COVID-19 Emergency Response Bill 2020 (“Bill”) that was enacted on Thursday 9 April 2020 also contains specific residential tenancy provisions.
These provisions have been modified to the operation of the Residential Tenancies Act 1995.
To date, there is still no announcement by the South Australian Government on a residential rate rebate for landlords and renters as has been enacted by some of the other States/Territories.
What are your obligations as a landlord?
- Failure to pay rent where the tenant is suffering financial hardship will not result in a breach of the agreement, nor can the residential tenancy be terminated
- The landlord must not increase the rent payable under a residential tenancy agreement, except where exceptional circumstances exist
- No interest can be payable on unpaid rent
- Payment of rent will be taken to include a reference to the payment of an amount relating to water supply.
What are your obligations as a tenant?
- It is expected that tenants who have the capacity to pay full rent, will continue doing so.
- An omission of the tenant in response to the COVID-19 pandemic will not be taken to amount to breach of the residential tenancy agreement or amount to a breach of the residential tenancy agreement
- Inspection of premises may only occur by means of audiovisual or other electronic means, and the tenants are expected to take all reasonable measures to facilitate such inspections
- There is an extended period for repairs to be carried out on premises, in accordance with any agreement with the landlord relating to such repairs.
The Tribunal has been granted specific powers during the prescribed period to deal with any residential tenancy disputes as follows:
- The Tribunal cannot terminate a residential tenancy or make on order of possession of the premises as a result of failure to pay rent whereby the tenant is suffering financial hardship
- The Tribunal can instead modify a residential tenancy agreement during such a period of suspended operation so as to reduce the tenant’s immediate financial obligations under the agreement
- It can modify or suspend any prescribed order, confirm, vary or quash any prescribed action done on purportedly done by a landlord
- Its overriding position must be to balance the need to ameliorate the effects of the pandemic in the State and the need to avoid homelessness during such a public health emergency.
If you have any questions in relation to the South Australian Commercial and Residential Tenancy Provisions or its application, please contact your Holman Hodge adviser.