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Many lessees and lessors are facing significant financial difficulty as a result of enforced closure of their businesses or a dramatic downturn in customers due to social distancing and work from home requirements.
On Tuesday 12th May 2020, the SA Government announced that changes would be made to the Covid-19 Emergency Response Act 2020 (COVID Act) in relation to matters involving commercial leases.
The Act and Regulations make various temporary modifications to the law of the State in relation to commercial leases in response to the COVID-19 pandemic including stopping evictions.
Under the amended COVID Act, the Government has increased powers to make regulations, if necessary, for the purposes of mitigating the adverse impacts on a party to, or any other person with an interest in, a commercial lease resulting from the COVID-19 pandemic.
New Regulations have commenced operation on 15 May 2020 to guide the negotiation, mediation and ultimately a Magistrates Court determination process.
The Regulations impose an obligation on lessees and lessors.
The specific wording of the Regulations Part 2 (6) provides:
The parties to a commercial lease and any guarantor or other person with an interest in the lease must make a genuine attempt to negotiate in good faith the rent payable under, and other terms of, the commercial lease during the prescribed period, having regard to:
(a) the economic impacts of the COVID-19 pandemic on the parties to the lease; and
(b) the provisions of the Act and these regulations; and
(c) the provisions of the National Cabinet Mandatory Code of Conduct—SME Commercial Leasing Principles During COVID-19 published on 7 April 2020.
A copy of the National Cabinet Mandatory Code of Conduct—SME Commercial Leasing Principles During COVID-19 published on 7 April 2020 can be found here.
If a lessee is an affected lessee, a lessor cannot take any prescribed action against the lessee on grounds of a breach of a lease during the prescribed period consisting of:
A lessee is an affected lessee if:
(a) the lessee is suffering financial hardship as a result of the COVID-19 pandemic; and
(b) the following turnover in a relevant year was less than $50 million:
(i) if the lessee is a franchisee—the turnover of the business conducted at the premises the subject of the commercial lease;
(ii) if the lessee is a corporation that is a member of a group—the turnover of the group;
(iii) in any other case—the turnover of the business conducted by the lessee at the premises the subject of the commercial lease.
Prescribed action means taking action under the provisions of a commercial lease or seeking orders or issuing proceedings in a court for any of the following:
Prescribed period means the period beginning on 30th March 2020 and ending on 30th September 2020.
Unless otherwise agreed between the lessor and lessee, rent must not be increased during the prescribed period if the lessee is an affected lessee. Rent determined by turnover is excluded from this provision in the Regulations.
A lessor must not require an affected lessee to pay land tax or reimburse land tax if the lessee is suffering financial hardship as a result of the COVID-19 pandemic.
It Is important to note that leases entered into after 30 March 2020 are outside the Regulations, except for renewals or options to renew or extend an existing lease on the same or substantially similar terms.
The Regulations also provide for the situation that if the parties have agreed a variation or modification to the operation of the lease between 30 March 2020 and 15 May 2020, the Magistrates Court cannot make an order to vary the agreement during that period of time, but they can change the agreement going forward.
As a first step, lessees and lessors are encouraged to commence discussions on any matters relating to leases including deferral and/or waiting of rent, rent free periods or any other modifications to leases which will help both parties through this difficult time.
The Small Business Commissioner has produced a guidance note for parties to a lease in relation to the provision of financial information to assist in negotiations. Download the Covid-19 Guidance Note – Commercial Information “requests” by Commercial Lessors Factsheet.
If agreement is reached, that agreement and any changes to the lease should be documented and executed by all parties.
If signing is not possible, parties should consider exchanging agreements electronically.
Parties are strongly advised to obtain their own independent expert advice – be that financial and/or legal – BEFORE committing to any changes in their lease arrangements.
If parties to a commercial lease are unable to resolve their dispute, a lessor or an affected lessee may lodge a dispute on the Office of the Small Business Commissioner (OSBC) website.
An OSBC officer will contact the parties and, if appropriate, arrange for mediation. The Small Business Commissioner will allocate a mediator from his panel for this purpose.
There will be no cost to the parties for mediation. It is expected that parties will negotiate in good faith.
The mediation may be conducted in person, by video conference or teleconference or a mix thereof and parties should ensure they have access to a computer/mobile device for the mediation, if necessary.
Parties will be required to execute a mediation agreement prior to the mediation commencing and ultimately, if the mediation is successful, a legally binding settlement agreement will be made by the parties.
If the mediation process:
The Small Business Commissioner will issue a Mediation Certificate to both parties which is required BEFORE any action to resolve the matter can be commenced in the Magistrates Court.
Enquiries can be made to the Office of the Small Business Commissioner via email sasbc@sa.gov.au
For information on residential tenancies, contact Consumer and Business Services