On 15 May 2020 the South Australian Parliament passed the COVID-19 Emergency Response (Further Measures) Amendment Act 2020 (SA) (Amendment Act) along with the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (SA) (Regulations) to give legal effect in South Australia to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (National Code).
The Amendment Act and Regulations replace the commercial lease provisions contained in section 7 of the COVID-19 Emergency Response Act 2020 (SA) (Act) that was enacted on 9 April 2020. The Regulations now contain all the substantive provisions and include the former provisions of section 7 of the Act and new provisions which seek to give legal effect to the principles of the National Code, which was published by the Federal Government on 7 April 2020.
Who do the Regulations apply to?
The Regulations apply during the “prescribed period” (30 March 2020 to 30 September 2020) to “affected lessees” of commercial leases that were entered into on or before 30 March 2020 (not including extensions or renewals of existing leases after that date).
An “affected lessee” is a lessee whose turnover in a relevant year was less than $50 million and who is suffering financial hardship as a result of the COVID-19 pandemic (which is defined as being eligible for or receiving a JobKeeper payment in respect of the business of the lessee).
For more information on JobKeeper eligibility, please see our National Taxation Group’s article here.
Restrictions on enforcement of leases
The Regulations now contain the former provisions of section 7 of the Act and provide that a lessor cannot take any “prescribed action” against an “affected lessee” on grounds of a breach of the lease during the prescribed period consisting of a failure to:
- pay rent;
- pay outgoings; or
- open for business during the hours specified in the lease.
“Prescribed action” means taking action under the lease or seeking orders or issuing proceedings in a court for any remedy, including (but not limited to):
- evicting the tenant;
- exercising a right of re-entry;
- recovery of the whole or part of a security bond or other security;
- termination of the lease; or
- any remedies available at common law or under SA legislation.
Notably, the Regulations have not clarified the ambiguity that in our view existed in the drafting of the previous section 7 of the Act, being whether a lessor is prevented from taking a “prescribed action” during the prescribed period in respect of a failure to pay rent or outgoings or to trade from the premises, prior to the commencement of the prescribed period on 30 March 2020. It is our view that there is a need for further clarity on this point and we recommend that lessors do not take any “prescribed action” without obtaining legal advice.
Negotiation for rent relief
The parties to a commercial lease are now required to make a genuine attempt to negotiate in good faith the rent amount or other terms of the lease, having consideration to:
- the economic impacts of the COVID-19 pandemic on both of the parties (including the lessor);
- the provisions of the Act and Regulations; and
- the provisions of the National Code.
In the first instance, if negotiations are unsuccessful, parties may apply to the SA Small Business Commissioner (Commissioner), who has broad oversight to mediate disputes.
If mediation is unsuccessful, either party may then choose to apply to the Magistrates Court for resolution of the relevant dispute.
The Magistrates Court has broad power to make orders to resolve disputes between parties to a commercial lease, including (but not limited to):
- determining whether or not a lessee is an affected lessee;
- an order granting rent relief to an affected lessee in relation to payment of rent under the commercial lease, where at least 50% of the rent relief determined by the Court must be in the form of a waiver of rent;
- an order requiring the payment of some or all of the rent under a commercial lease into the Court until the lease has been performed;
- an order requiring that rent paid into the Court be paid out and applied as directed by the Court;
- an order varying the terms and conditions of a lease in a manner specified in the order;
- an order to defer the payment of rent under an affected lease for a specified period not exceeding 24 months from the day on which the order is made (and extending the lease term for the corresponding period); or
- any other orders the Court thinks necessary or desirable to resolve the dispute.
In respect of any agreements for rent relief already entered into between lessors and lessees, between 30 March 2020 and 15 May 2020, the Regulations provide that the Magistrates Court may not modify or affect the operation of such agreements prior to 15 May 2020. However, the Magistrates Court may still modify or affect its operation after 15 May 2020.
Nothing in the Regulations prevent a lessor from taking prescribed action where a lessee is in breach of an agreement reached following mediation or court order.
What other restrictions apply to the lessors of “affected lessees”?
In addition to the above, lessors should also note the following impacts of the Regulations:
- the rent of an “affected lessee” must not be increased during the prescribed period, other than through turnover rental;
- an act or omission of a lessee that was required by Government in response to the COVID-19 pandemic (such as the direction to close or reduce trading hours), will not amount to a breach of lease; and
- a lessor must not require an “affected lessee” to pay land tax or reimburse the lessor for land tax (noting that the Retail and Commercial Leases Act 1995 (SA) already prohibits the recovery of land tax in respect of leases that are subject to the operation of that Act).
Land tax relief and deferral
The SA Government has announced land tax relief through a 25% reduction on the land tax payable on a parcel of land in the 2019-20 land tax year. This applies to lessors who provide “affected lessees” with rent relief.
Applications for this relief will be open until the end of June 2020 and details on the application process are currently being finalised by the SA Government.
This relief is available when:
- the land is used for residential or non-residential (commercial) purposes;
- the land is being leased to either a residential lessee, or a commercial “affected lessee”;
- the lessor reduces the rent of the “affected lessee” by at least as much as the land tax reduction; and
- the land tax is directly related to the land for which the rent has been reduced.
If a lessor receives a waiver of land tax or a relief payment under this scheme, the lessor must pass on the benefit of the waiver or relief payment in the form of a waiver of rent payable.
The SA Government has also announced that businesses and individuals paying land tax quarterly in 2019-20 will be able to defer payment of their third and fourth quarter instalments for up to six months from the due date of the third instalment. Tax payers who chose to defer payments, will have these amounts shown as arrears on their first land tax notice for 2020-21. This is not a waiver of land tax and it will still need to be paid within the timeframe mentioned above.
How can HWL Ebsworth help you?
At HWL Ebsworth our team is made up of Partners and property experts dedicated to providing support to our clients in relation to the widespread ramifications of the COVID-19 pandemic, including providing guidance and advice to lessors, lessees and managing agents negotiating with COVID-19 related issues and documenting agreed arrangements. If you have any queries regarding these Regulations or require further advice on the impacts on your particular lease arrangements please contact one of our Partners below.
This article was written by Damien Foulis, Partner, Adam Ludlow, Partner and Chloe Pruszinski, Law Graduate.