What legal cures can landlords with bad tenants take now the Response Period under the Covid-19 “emergency response” regulations have ended?

Restrictions, remedies and practical considerations for landlords handling defaulting tenants in Queensland following the COVID-19 Pandemic.  

Whether it’s the case of a long-term tenant who suddenly stops meeting their obligations under their lease, or a new tenant who fails to comply right from the start, it can be difficult for a landlord to determine the best way to deal with a defaulting tenant.

This was complicated further last year with the COVID-19 pandemic and the subsequent introduction of the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (“the Regulation”). 

Overview of the Regulation Restrictions

The intention of the Regulation was to mitigate the effects of the COVID-19 pandemic on the struggling retail sector by adopting the principles set out in the National Cabinet Mandatory Code of Conduct.  For “affected leases” under the Regulation, it curtailed many of the landlord’s usual rights to relief during the Response Period (commencing 29 March 2020 and extending through to 31 December 2020).  In particular, landlords under “affected leases” were prohibited from:

• requiring the performance of an obligation under the lease, by either a tenant or a guarantor, to pay tenancy charges or open for trade during the Response Period;
• making a claim on a bank guarantee or security bond for unpaid tenancy charges payable under the lease during the Response Period; and
• terminating the lease, or exercising a right of re-entry of the premises, for a failure to pay tenancy charges or open for trade during the Response Period.

This effectively placed a ban on taking action against any default by a tenant which could be perceived as resulting from the COVID-19 pandemic.

What is an Affected Lease?

A lease was classified as an “affected lease” under the Regulation where:

• it was a retail shop lease or a lease wholly or predominantly for carrying on the business of the tenant;
• it was current and binding on the tenant as at 28 May 2020 (this included any right to occupy premises, such as a hold over tenancy under an expired lease);
• the tenant under the lease was a small and medium enterprise (SME entity) that carried on a business (or non-profit activity) with a turnover that was less than $50 million for the 2019-20 financial year and/or had an anticipated turnover of less than $50 million for the 2020-21 financial year; and
• the tenant under the lease was eligible for, but not necessarily enrolled in, the JobKeeper Payment scheme.

Legal Remedies Available for Default

Even now, under the Regulation a landlord of an “affected lease” cannot take any action on a breach in connection with an arrears or failure to trade which arose during the Response Period.

However, nothing in the Regulation prevents a landlord from taking action against a default which:

• arose prior to the Response Period (prior 29 March 2020);
• arose after the Response Period (post 31 December 2020); or
• is committed during the Response Period but is unconnected to COVID-19 (such as wilful damage or a failure to repair the premises).

For these types of default, the legal remedies available for a landlord include:

• issuing a letter of demand requiring payment of any arrears, or performance of an obligation under the lease;
• serving a Form 7 Notice to Remedy Breach of Covenant pursuant to Section 124 of the Property Law Act 1974 (Qld) setting out the breach/es of the lease and prescribing the remedy required and a reasonable time for the performance of that remedy (Breach Notice);
• terminating the lease for failing to remedy a breach in accordance with a Breach Notice; or
• terminating the lease at Common Law for breach of an essential term, or repudiation of the lease (for example, permanent abandonment of the premises or written evidence of intention by a tenant not to be bound by the lease).

Less commonly, a landlord may also have the statutory right to terminate a lease under Section 107 of the Property Law Act 1974 (Qld), although the application of this provision is often contractually excluded from leases.

Practical Considerations

Just because a tenant has defaulted under a lease, does not mean that a landlord’s options are limited to issuing a Breach Notice and terminating the lease. Indeed, there are a number of scenarios in which keeping a lease on foot with a defaulting lessee may be preferable, including:

• where the likelihood of finding a replacement tenant is low, and an empty tenancy in a sluggish rental market will impact negatively on the landlord;
• there is some doubt about the availability of loss of bargain damages or the tenant’s capacity to pay those damages; and/or
• keeping the premises occupied is beneficial to the landlord’s other tenants.

In these instances, a landlord should seek legal advice on alternative remedies available for addressing the default (such as drawing down on a bank guarantee, negotiating a partial payment of arrears or instituting an action against the tenant for arrears or damages). Alternatively, where a struggling tenant is equally keen to end their tenancy, a landlord may choose instead to negotiate an assignment or surrender of the lease, subject to the lessee paying an amount in settlement of any arrears or providing another form of alternative remedy (for example, the lessee agreeing to leave in situ a desirable fit-out, or items of lessee equipment, to help lure a replacement tenant).

Implications

There are several options available to a landlord to breach, terminate, or otherwise deal with a defaulting tenant following the expiry of the Response Period under the Regulation. However, any delay in taking action against a tenant while defaults pile up or stretch out has its risks, and the landlord’s behavior may start to look like a waiver.

If you are experiencing difficulties with a defaulting tenant and would like advice on whether the Regulations will impact your rights, or advice on the remedy options available to you, please email Rebecca Durrant or John Woods, or call us now on (07) 3243 0000.