Shortly after the World Health Organisation declared COVID-19 a pandemic, the South Australian government introduced temporary measures to assist those who were experiencing financial hardship due to the pandemic, including certain commercial tenants.
There have been several rounds of changes to these temporary protection measures in South Australia. The currently applicable measures are set out by the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 ('the Regulations').
From 30 March 2020 to 30 September 2020, the Regulations are deemed to apply to all commercial leases in South Australia. This includes all extensions or renewals of commercial leases occurring after 30 March 2020, provided that they are on substantially the same terms as the earlier lease. However, the Regulations do not apply to new leases entered into after 30 March 2020.
The Regulations set out:
- specific protections for certain commercial tenants suffering financial hardship against enforcement action by their landlord; and
- a general obligation on all commercial tenants and landlords to negotiate in good faith and, if they fail to reach agreement, a process for resolutions of disputes through mediation by the Small Business Commissioner or by Court.
It is important to note that while the specific protections and general obligation somewhat overlap, the general obligation applies whether or not commercial tenants have suffered financial hardship.
Specific protections for certain commercial tenants suffering financial hardship
The protections preclude commercial landlords from taking action against most commercial tenants (referred to as 'affected lessees') in the event that an affected lessee breaches their lease by not paying rent or outgoings, or does not open their business during any business hours specified in the lease. A commercial landlord also cannot require an affected lessee to pay land tax, nor can it increase the rent payable by the affected lessee, unless the affected lessee agrees to this increase.
The purpose of the Regulations is to protect small and medium-sized businesses. If a commercial tenant has a turnover exceeding the threshold of $50 million in the 2018/2019 financial year, they are not an 'affected lessee'.
Otherwise, if a commercial tenant has a turnover below that threshold for the 2018/2019 financial year and is suffering 'financial hardship' as a result of the COVID-19 pandemic, the protections apply. (A commercial tenant is assumed to be suffering financial hardship if it is eligible for, or receiving a JobKeeper payment.)
Some care needs to be taken when assessing the turnover of a commercial tenant because the Regulations are somewhat unclear in this regard. For example, if a commercial tenant is a 'corporation that is a member of a group', the applicable turnover is that of the whole corporate group, not just the particular leased premises. However, this expressly does not include franchisees. Further, the Regulations do not expressly set out the method of calculation of turnover that is to be used. It is most likely that this should be the same method that the tenant used to self-assess JobKeeper eligibility, but it is unlikely that a commercial landlord will know the method that a commercial tenant uses to assess turnover.
The general obligation to negotiate in good faith
The Regulations make it a term of every commercial lease that the parties must make a genuine attempt to negotiate in good faith the terms of their lease, and in particular the rent payable. In doing so, the parties must have regard to:
- the economic impacts of the COVID-19 pandemic on both parties to the lease;
- the provisions of the Regulations; and
- the provisions of the National Mandatory Code of Conduct published by Federal Cabinet on 7 April 2020.
The overarching principle of the National Mandatory Code of Conduct is that parties to a commercial lease should share the financial risk and cashflow impact during the COVID-19 period, while seeking to appropriately balance the interests of tenants and landlords. In particular, it promotes honest and transparent negotiations, but acknowledges that each commercial lease must be dealt with on a case-by-case basis.
Further, if a dispute arises between the parties to a commercial lease and one party becomes non-communicative or uncompromising in their position, a party can seek mediation before the Small Business Commissioner. That step needs to be taken before proceeding to determine a dispute at Court.
In any event, a commercial landlord is entitled to enforce rent determined at a mediation before the Small Business Commissioner or determined by the Court. Accordingly, a commercial landlord may insist on reaching an agreement at mediation, rather than seeking to reach an agreement through private negotiations.
To assist parties to a commercial lease in understanding how the Regulations may impact them, we have devised flow charts (available for download at the PDF link on this page).
Download article PDF fact sheet.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.