Landlords and tenants Queensland: What next?

On Wednesday 22 April 2020 the COVID-19 Emergency Response Bill 2020 (COVID-19 Act) was passed. In our latest article, we look at the impacts of the Bill on commercial and residential landlords

Firstly, it is important to understand the intentions behind the Bill.

Secondly, it is crucial you do not agree to anything or sign any documents without careful advice and following a process. This includes getting the terms of any agreement to vary a lease in writing as to the fundamental points, getting a formal deed of variation signed on correct legally enforceable terms and preparing then lodging on the title the amendment to Lease. This is particularly critical for any extended term of the lease, Option exercise dates and market rental review dates.

Understanding the COVID-19 Act 

Its purposes are:

  1. to protect the health, safety and welfare of persons affected by the COVID-19 emergency;
  2. to facilitate the continuance of public administration, judicial process, small business and other activities disrupted by the COVID-19 emergency, including by easing regulatory requirements and establishing an office of the Small Business Commissioner;
  3. to provide for matters related to residential, retail and prescribed leases affected by the COVID-19 emergency; and
  4. to support the Queensland rental sector during the COVID-19 emergency period.

The Act effectively enables Ministers to make extraordinary regulations that override other Acts if the Minister is satisfied the regulation is necessary for the purposes of the COVID-19 Act.

What does it mean for Queensland landlords and tenants?

It allows Ministers of various Queensland Departments to make regulations to ensure the health and safety due to the COVID-19 emergency and the continuance of public administration, small business and other activities. This includes Retail Shop and Commercial leases as well as leases from Government owned buildings.

Regulations of the Act 

The regulations the COVID-19 Act will include, among others, are:

  1. The establishment of the Small Business Commissioner to provide a single point of information and advice, especially in relation to dispute resolution;
  2. Protect residential tenants who are not able to meet their obligations;
  3. Remove landlord obligations to undertake routine maintenance if the landlord is unable to enter the premises; and
  4. Introduce good faith leasing principles for landlords and tenants of non-residential tenancies.

At the time of writing, the only Regulation that has been tabled in the Residential Tenancies and Rooming Accommodation (COVID-19 Emergency Response) Regulation 2020 (Regulation).

The Regulation will override provisions in the Residential Tenancies and Rooming Accommodation Act 2008. The Regulation is detailed and provides for:

  1. Protection of tenants who suffer a 25% loss of income or where the rent payable is more than 30% of the tenant’s income;
  2. A moratorium on evictions until the earlier of 29 September 2020 or the last day of the COVID-19 emergency period;
  3. If a tenant is suffering excessive hardship an extension of the term until 30 September 2020; and
  4. A limitation to recover re-letting costs to one week’s rent if the tenant suffers a loss of income of 75% or more and the tenant has less than $5,000 in savings.

Retail and other prescribed leases

Part 7 of the Bill addresses retail leases and other prescribed leases by establishing a regulation-making power. The Bill itself does not lay down substantive rules of law governing the practical issues experienced by landlords and tenants through the COVID-19 pandemic, but merely provides for the passage of subsequent regulation dealing with those issues.

In reference to the explanatory notes of the Bill, the policy objective of the Bill is to provide a legislative framework to facilitate the implementation of the good faith leasing principles provided in the National Cabinet Mandatory Code of Conduct (Code of Conduct). The powers will allow regulation to be made that will:

  • prohibit the recovery of possession of premises
  • prohibit the termination of a lease
  • regulate or prevent the exercise or enforcement of any other right under a lease agreement
  • exempt a particular type or class of tenants from the protection of the Bill
  • require parties to comply with particular principles, a prescribed standard or code when negotiating or disputing a matter under a lease, and
  • provide a dispute resolution process throughout the coronavirus pandemic

At this stage the regulation-making power is time limited to 31 December 2020, but the Bill does not provide a time in which any regulation itself will cease to be of effect. This will likely be dealt with in the regulation itself.

Relevant leases

The type of leases that the Bill applies to are:

This means that the Bill itself gives a focus to retail leases but relies on the further regulations to further deal with other leasing agreements, such as commercial or industrial leases.

The Bill contemplates that any subsequent regulation will be applicable to relevant leases, sub-leases, licences or any other agreement to occupy premises, other than a residence.

Small Business Commissioner

The Bill also establishes an office of Small Business Commissioner, which is relevant to a lease of a premises used for a small business (small business lease) and for a dispute relating to the small business lease (small business tenancy dispute).

The purpose of the Small Business Commissioner is to deliver advocacy and dispute resolution support for small businesses and to provide small businesses with a single point of contact for leasing disputes. The Commissioner will have powers to enable the regulation to be used to prescribe the dispute resolution procedure for small businesses.

The functions of the Small Business Commissioner include:

  • providing information and advisory services about matters relevant to small businesses
  • assisting small businesses in reaching an informal resolution for disputes relating to small business leases, and
  • administering a mediation process in relation to small business tenancy disputes

The Land (Covid-19 Emergency Response-Waiver and Deferral of Rents and Instalments) Regulation 2020 passed last week. This only covers tenants of Government buildings and has a defined threshold requirement as well as a formula based resolution process.

The Commercial Leases of private owned properties are yet to be regulated

Consider the options:

Waiver of rental being irrevocable

Agreement to reduce rental for a fixed period

Agreement to defer rental for a fixed period linked to lock down or end of the declared covid crisis

Waiver for non-performance for a set period

Agreement to change the dates for performance of rental and outgoing or other requirements under the lease for a set date

Agree to vary the lease as to the Term, the Option exercise date, or market review dates.

Landlords and tenants must be very careful in the renegotiation process to ensure good faith and adequate legal representation.

We have developed a system for compliance by:

1 Negotiating a Terms Sheet that complies with the regulations to ensure all fundamentals are clearly recorded including a working example;

2 Drafting and signing a formal Deed of Variation of Lease signed by both parties and on independent legal advice;

3 A formal Amendment to lease signed and lodged for registration on the title to the property to ensure all subsequent owners are alerted to any changes and it is binding.

Please call or email to arrange a web conference to discuss your circumstances.

Real Value of Due Diligence and Independent Advice.

The enemy within

It never ceases to amaze me how people can be so trusting when entering into a business transaction with someone they don’t know very well.

As part of small business management, it is usual when acquiring an asset that the director exercises a reasonable level of due diligence before committing to the transaction. Certainly, a high level of scrutiny is given to the purchase of such items as plant and equipment or stock. One can only wonder why a director would leap into a financial or structural change without the same degree of scepticism.

Recently, I encountered another example of a business that had been created with a potential significant time bomb lodged in the structure.

My clients were skilled construction individuals who had created a unique method of surface material application and decided to start their own business.

Lacking the acumen, advice and funding, they accidentally discussed the matter with an unknown third party, who decided to offer them start up finance. A company was duly formed and, on the advice of the accountant for the third party, a change in the constitution occurred.

This was a significant moment in the life and destiny of the business. The accountant made it clear that he was acting only in the interests of the third party investor, but for some inexplicable reason, this did not trigger a warning to the other two to seek independent advice.

As a result, a special class of shares was issued to the third party and highly restrictive voting powers imposed upon the two original shareholders. In fact, the third party forced a change to the constitution to the extent that, at any time, the third party could appoint himself as a director.

The two working directors, who had taken the majority of the business risk, were left having no real control over the company, could not seek out further or alternative funding and certainly could not complain about the management style of the third party.

Regardless of their predicament, they set about working hard in the business seven days a week; taking risky contracts with difficult time lines; employed and managed the staff; juggled cash flow; and somehow managed to repay the third party the principal and interest on time. To make matters worse, from the outset, the spouse of the third party shareholder had a registered first charge over all the assets and undertaking of the company pending receipt of the final payment of principal and interest.

Effectively, upon a minor or technical default, such as production of figures or reports, the spouse could have appointed a receiver at any time.

Eventually, the two original directors reached the end of the period of repayment and, due to the growth in the business and increasing complexity of financial management, they finally sought independent accounting advice. The accountant was surprised to find the change in voting rights and the registered charge had been orchestrated from the outset and gave the directors their first independent view of their position.

It came as a shock for them to understand that they could lose all that they worked for at any time and that, in fact, they at no stage really controlled the company.

No formal meetings were ever held and surprisingly, the third party sat back and let the principal and interest repayments come in without inquiring further.

The next stage of the relationship became critical. Now they had obtained this independent advice they were angry at the way that it had occurred, but understood all to well that now was not the time to incite an argument with the third party or his spouse as secured creditor.

Two crucial outcomes were sought:

  1.  To ensure that at the point that the loan was repaid in full, a release of charge would be provided in exchange; and
  2. At the same time, a change to the constitution would occur whereby the voting rights would become equal again.

You can well understand that they felt a little intimidated, calling a meeting to resolve the matter. On advice, they were open about the agenda for the meeting, the changes they were seeking and produced an independent valuation for the shares. They now realised that they were not guaranteed to free themselves of the existing shareholder with higher voting rights and that, as the company improved its financial position, so too did the value of the shares. The longer they waited to address the matter, the higher the exit price would become for the third party.

From an innocent first handshake discussion they had been outmanoeuvred carefully and had indeed helped create an enemy within.

The choices were:

  • Pay a premium on the shares; or
  • Liquidate the company and start again.

All the hard work could be undone in a matter of one moment of disagreement with the third party.

Thankfully, the share price reflected a very good capital gain for the third party and the element of risk for the future was enough to convince them to take a clean exit. The two original directors have learned a valuable lesson about business due diligence and they are addressing several other outstanding issues:

  • A formal shareholder’s agreement and a business succession plan, and
  • A review of their trading terms and conditions and the structure of their finance.

They have formal meetings which are recorded and copied to the accountant. The lesson is always the same: If it sounds too good to be true, it usually is.

ATC Digest Edition #75

Business Succession and Property

Each business will have its unique requirements.

I assisted some clients in relation to a business succession agreement for four partners in a successful business.

At the time of formation of the original business entity, there was a simple husband and wife team. Over the years, the business grew. They were joined by their management executive and they sold shares in the company as a result.

The business expanded again and they sold a further tranche of shares to another key management person.

During the expansion phase they also had the opportunity to purchase the business real property from which the business was conducted.

As it was around the time of the last manager’s buy in, he could not afford to purchase an interest in the property as well.

So the end reality was four business owners and three property owners.

They acquired the property in a separate family discretionary trust as tenants in common in one-third shares each. A commercial lease was established between the business trading entity and the three trusts as owners of the property.

All simple so far…

The question arose as to how to deal with the property interests upon death of a principal in the business.

It is a simple matter for the one that did not buy in, as it is simply the value of his interest in the shares of the trading entity. However, when it comes to the buy/sell agreement for the three that have an interest in the property, this was a completely different matter.

The issues are

  1. Does the deceased business owner need a continuing interest in the real property
  2. Is there a greater inherent value to the property in light of the commercial lease linked to the business
  3. Should the principals be able to leave the property interest to their family in their estate as a separate matter from the business
  4. Does the buy/sell agreement take account of the goodwill attached to the business premises?

These questions were more difficult to answer than I first thought. It was always a regret of the last owner to buy in that he did not acquire an interest in the property as well. It may be that this is dealt with separately and there is no requirement to sell down the interest in the property.

In the interim, a solution was reached so that the value placed upon the business had a recognition of the business premises, pursuant to the long-term lease in place with the current owners.  A simple buy/sell agreement was prepared to allow for self insurance of the principals in the business.

Further, self-owned policies were put in place for the property ownership via the family trusts. It was an issue as to how the mortgage facility was structured and the parties are considering a variation to the agreement that governs the holding of the property. I have recommended that this be included in the buy/sell agreement, to allow the continuing owner that presently does not have a share in the property, a right of first refusal to buy that interest of the departing principal.

All sorted, for now…

ATC Digest Edition #86

Do You Know Your Shareholders?

You probably can’t stop disputes, but you can diffuse them more easily.

It is a critical step for a business owner to understand the implications of an agreement with the people they own the business with and the rules, should they have a dispute.

Commonly, parties confirm how a company should be managed by the terms of a Shareholder’s Agreement.  However, often I find that people do not bother with such an agreement. They feel when times are good there is less chance of an argument, or they have a perception the costs of preparing this document are too high.

The reality is that, if the parties have a dispute, the costs will be enormous.

Here are a few tips and pointers in preparing a document and understanding its importance.

Directors

  • Directors should be carefully chosen to ensure that control and daily management of the company occurs in a way that reflects the understanding of all concerned.
  • There are very serious obligations on directors, including Workplace Health and Safety liability, tax liability and Corporate Act penalties for non-compliance. This includes keeping proper accounts, acting in the interest of the company as a whole and not obtaining a benefit where there is a conflict of interest.
  • The specific roles of each director should be set out clearly, whether it is finance, accounting, marketing, legal or management of staff.
  • The degree of delegation and authority to a director, including signatures required on cheque accounts or transfer of funds from a bank, should be clearly stated. Often small companies have at least two directors that must sign for the capital account and just one director or a secretary for a smaller operational account.

Limitations

  • A Shareholder’s Agreement should describe the limitations placed on directors in acting on behalf of the company. That might be the credit limits that apply for which they can commit the company and should state the maximum debt a single director can write off or compromise. It should also state how many directors must sign cheques and other negotiable instruments or contracts.
  • The quorum or number of directors required to form a valid meeting should be clearly outlined. The ability to appoint a proxy or alternate director in writing should be described. If there is a managing director with a casting vote, then that should be very clearly enunciated within the document.
  • The role of managing director should be described sufficiently including the process and frequency of appointment.

Voting

  • The equality of votes, or otherwise, by the directors appointed to the board should be clearly stated.
  •  If there is to be a casting vote on certain issues by a managing director, or if there is a deadlock, that should be included.
  • Whether a shareholder has the right to one vote at a shareholder’s meeting or whether votes are attributable to the number of shares held, then that should be clearly stated.
  • Whether the shareholders votes are affected by restricted issues should be included and it should identify the input of a non-shareholding director in the management of the company.
  • Any Shareholder’s Agreement should be resolved in general meeting to override the constitution, when appropriate, on specific issues.
  • Points such as a full sale of the business might need a unanimous decision of shareholders, as well as the admission of new shareholders or transfer of shares.
  • The events of default of a director or shareholder, including breach of agreement, insolvency, disability or perhaps death should be dealt with.
  • The process of meetings including how regular, where and agenda decisions should be included.
  • On exit of a shareholder there should be a reference to an independent valuation and perhaps a conditional grant of options subject to the event. A notice of retirement of director and whether that triggers a compulsory sale of their shares should be considered.
  •  The methods of dispute resolution should be canvassed including compulsory mediation and whether that appointment is by way of a professional expert.

Other issues

  • In reality, this Shareholder’s Agreement will be the document that is used if the parties cannot agree. It should have a positive emphasis, including the specific vision for the company and perhaps growth targets anticipated by the shareholders within an agreed time frame if they aim to grow the business or sell within a specific period.
  • If there are specific business planning issues, targets such as achievement of quality control or accreditation, then they should be included.
  • Specific qualities of a director or financial position of a shareholder should be specified as well.
  • Requirements regarding retirement of a director or exit of a shareholder by voluntary notice should be clearly stated in writing. This should take account of the position of the company and the financial framework.
  • If the shareholders are contributing capital then they should record any loans on the balance sheet.

If the directors require further loans from working capital or stock or plant and equipment, then each director and perhaps each shareholder should guarantee the loan equally in accordance with their shareholding to make sure there is fairness between them. If there are different levels of contribution of capital loans by shareholders or directors to the company then that should be recorded in formal loan documents and interest paid.

By having a clear checklist of these issues completed by the parties at the outset, it is less likely that a surprise or a point of dispute will occur in the future.

Independent accounting and legal advice should be obtained by each shareholder on a proposed Shareholder’s Agreement to ensure that all parties understand their obligations and requirements.

At the end of the day, people get together to create company value. It is, therefore, important to ensure that the rules are understood so that that value is preserved wherever possible.

ATC Digest Edtion #85