Negotiating Commercial Leases to protect Cash Flow – DFK Gray Perry

Many businesses 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.

State and Federal Governments have implemented various measures to assist business through the coming months. Some of these measures provide funding to businesses, others are aimed at reducing their overheads.

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.

A copy of the media release issued by the Attorney-General Hon Vickie Chapman MP can be found here.

The amending legislation was introduced into State Parliament on Tuesday 12th May 2020 and passed on 14 May 2020. A copy of the amended COVID-19 Emergency Response Act 2020 can be found here.

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 COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 (Regulations) can be found here.

Briefly, the Regulations impose an obligation on parties to commercial leases to negotiate in good faith.

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.

The Regulations include prohibitions and restrictions relating to commercial leases and in particular that:

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

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:

  • eviction of the lessee from premises that is subject to a commercial lease;
  • exercising right of re-entry to premises that is subject to a commercial lease;
  • recovery of land;
  • distraint of goods;
  • forfeiture;
  • damages;
  • requiring a payment of an interest on unpaid rent otherwise payable by a 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 commercial lease;
  • possession;
  • termination of the commercial lease;
  • any other remedy available to a lessor against a lessee at common law or under South Australian law.

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.

Negotiation and agreement is encouraged

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 here. 

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.

 

What if you can’t agree – the Office of the Small Business Commissioner (OSBC) may be able to help

If parties to a commercial lease are unable to resolve their dispute, a lessor or an affected lessee may lodge a request for mediation on the Office of the Small Business Commissioner (OSBC) website here.

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:

  • fails to achieve agreement or is unlikely to resolve the dispute; or
  • mediation would not be reasonable in the circumstances; or
  • a party refuses to participate or did not participate in good faith.

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

DFK Gray Perry is a leading accounting and business advisory practice based in Adelaide.

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