Commercial Leases – Covid-19 Emergency Response Declaration 2021

Contact: Mark Poretti

In response to the COVID-19 lockdown across the ACT, the ACT Government recently introduced the Leases (Commercial and Retail) COVID-19 Emergency Response Declaration 2021, which provides the framework under which COVID affected businesses and not-for-profit organisations can negotiate the terms of their commercial leases with their landlords.

The Declaration re-introduces the requirement for good faith negotiations between landlords and tenants before a landlord can take any adverse action against a tenant, including termination. This arrangement is applied retrospectively to 12 August 2021, for leases entered into before 12 August 2021.

To be eligible, a tenant must have an annual turnover of less than $50 million and must suffer a loss of at least 30% of revenue (or 15% if the tenant is a not-for-profit organisation).

If a tenant is eligible, the landlord cannot take adverse action against the tenant (for example, issue a breach or termination notice, or re-enter the premises) without having first conducted good faith negotiations. Although free to make any deal that suits the parties, the Declaration provides guidance as to when a landlord and tenant will have been considered to have negotiated in “good faith”, namely:

1. landlords and tenants should negotiate proportionate reductions in rent payable in the form of waivers and deferrals when compared to the reduction in the tenant’s trade, of up to 100% of the amount ordinarily payable;
2. rental waivers should constitute no less than 50% of the total reduction in rent payable and should constitute a greater proportion of the total reduction where a failure to do so would compromise the tenant’s capacity to fulfil its ongoing obligations under the lease;
3. waivers should allow a tenant at least the balance of the term of the lease or 24 months to repay the deferred rent, whichever is greater;
4. any reduction in a statutory charges should be passed onto the tenant in the appropriate proportion applicable under the lease;
5. landlords should seek to pass on benefits they receives in the form of deferred loan repayments and other reduced expenses; and
6. landlords should seek to waive recovery of other expenses, such as Outgoings, where it can do so but, if a landlord does this, they reserve the right to reduce services as required in such circumstances.

Critically, tenants who fail to comply with substantive terms of their lease are considered to have forfeited any protections afforded to them under the Declaration.

The Declaration also provides that if the parties cannot reach an agreement during these negotiations, the matter should be referred to an applicable commercial dispute resolution process for binding mediation.

Changes since the 2020 Declaration

As many landlords and tenants would be aware, the ACT Government put forward a similar declaration in response to the 2020 lockdowns. Whilst the two declarations are similar, there are some key differences between the two, including:

1. the Declaration remains in force until there is no longer a health emergency declared in the Territory;
2. the revenue decline is on the basis of the revenue of the tenant compared to 2019, which contemplates the decline in revenue since the beginning of the pandemic (noting that if the tenant company started in 2020 it is compared to their 2020 revenue);
3. eligibility is no longer tied to eligibility for JobKeeper payments.

Practical Example

For example, if a tenant has seen an 80% decline in revenue compared to 2019 and has a Lease due to expire in November 2021, a good faith negotiation may result in the following changes:

1. an 80% reduction in their rent obligations, with 40% being deferred and 40% being waived;
2. an extension to the expiry of the Term of the lease for at least 24 months; and
3. the continued payment of Outgoings, except for statutory tax charges for which the landlord has secured an exemption from.

Advice for Landlords

The ACT Government’s Declaration leaves little flexibility for landlords to resist bona fide applications from tenants for rental relief in the form set out above. If a landlord does receive a request, the landlord should assess whether the tenant has suffered a loss of revenue of 30% (or 15% if the Tenant is a not-for-profit) and, if so, promptly enter into good faith negotiations with the default position being the terms of the Determination.

Whilst the Declaration addresses circumstances where landlords should pass on benefits, it may create challenges for landlords who are reliant on the income their property provides. If you are in this position, the good faith negotiations may provide sufficient flexibility to incorporate this financial situation, but we recommend you contact us as soon as possible to assist you.

Advice for Tenants

If your business is being affected by COVID, you should have an early, upfront and honest conversation with your landlord about how COVID has affected your business and cash flow. If your landlord doesn’t engage, or seeks to institute some sort prescribed action against you prior to good faith negotiations, you should contact us as soon as possible to assist you.

You must also ensure that you are otherwise compliant with your obligations under your lease. If you fail to comply with the substantive terms of your lease the Declaration considers that you have forfeited your rights to the relevant protections.

The information in this document represents general information, and should not be relied for your specific circumstances. If you require legal advice and assistance on the matters contained or associated in this document you should contact Trinity Law. Subject to the limits of the law, Trinity Law disclaims any liability on persons relying on this document.