On 24 April 2020, NSW passed the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulation) under the Retail Leases Act 1994 (NSW) (RLA) and the Conveyancing Act 1919 (NSW) (CA), with the object of giving effect to the National Mandatory Code of Conduct - SME Commercial Leasing Principles During COVID-19 (Code).
What is the purpose of the Regulation?
The Regulation acts to:
- prohibit and regulate the rights of landlords with respect to enforcement of certain commercial leases during the COVID-19 pandemic period and
- require landlords and tenants to renegotiate the rent and other terms of commercial leases in good faith, having regard to the leasing principles set out in the Code, before any legal enforcement action may be commenced under those leases.
What leases are covered?
Commercial leases entered into prior to the commencement of the Regulation, which are either:
- a retail shop lease under the RLA or
- an agreement to which the CA applies, relating to the leasing of land for commercial purposes.
What leases are excluded?
- Any commercial lease entered into following the commencement of the Regulation (not including leases entered into under options to renew);
- Leases under the Agricultural Tenancies Act 1990 (NSW).
What does the Regulation do?
The Regulation prohibits landlords from taking ‘prescribed action’ against an ‘impacted lessee’ under the provisions of a commercial lease during the ‘prescribed period’:
- prescribed period means the period ending at the end of the day that is 6 months after the day on which the Regulation commences, meaning the effective prescribed period is 24 April 2020 to 24 October 2020.
- prescribed action includes:
- eviction, exercise of a right of re-entry, or recovery or possession of the premises or land;
- requiring payment of interest, fees or charges related to unpaid rent
- calling on any part of a security deposit or bank guarantee, or enforcing any guarantee
- termination of lease and
- taking any other action otherwise available to a landlord against a tenant under common law or State law.
Who is an impacted lessee?
An impacted lessee is a tenant:
- who qualifies for the Federal JobKeeper scheme* and
- whose turnover in the 2018-19 financial year was less than $50m.
* Per previous updates, eligibility for JobKeeper is dependent upon a tenant having had a more than 30% reduction in turnover as a result of COVID-19.
What constitutes turnover for the purposes of the Regulation?
Turnover is the turnover of the business conducted by the tenant during the 2018-19 financial year, including any turnover derived from internet sales of goods or services.
- In the case of franchisees, turnover is the turnover of the business conducted at the premises the subject of the lease.
- In the case of corporate groups (groups comprised of related bodies corporate), turnover is the turnover of the group.
What is prohibited?
Where a tenant is an impacted lessee:
- a landlord must not take any prescribed action against the tenant for a breach of the lease for failure to pay rent and/or outgoings or for the tenant’s business not being open for business during the hours specified in the lease.
- a landlord must not increase the rent during the prescribed period, nor take any action against the tenant following the prescribed period for failure to pay an amount equivalent to or representing any rent increase which may have otherwise applied.
- if the tenant is required under the lease to pay or contribute to the landlord’s insurance and/or land tax or other statutory charges, where that insurance or those charges have been reduced, the tenant is exempted from the liability to pay to the extent of the reduction.
- any act or omission of the tenant required under a State or Commonwealth law in response to the COVID-19 pandemic does not amount to a breach of lease and does not constitute grounds for termination or any other prescribed action by the landlord.
What is required?
- The Regulation requires the parties to a commercial lease to renegotiate the rent payable, and where relevant other terms of the lease, having regard to the economic impacts of the COVID-19 pandemic and the leasing principles set out in the Code.
- There is an obligation on landlords to comply with the requirement to renegotiate before they take or continue any prescribed action against an impacted lessee.
- Any party under the lease may request the other party to renegotiate, and the parties must negotiate in good faith.
What if the parties cannot reach agreement?
If the parties are in dispute, including dispute as to the renegotiation of rent payable under the lease.
Under the RLA, the dispute:
- may be referred to the Registrar of Retail Tenancy Disputes for mediation (noting that the Small Business Commissioner (SBC) acts as that Registrar under the RLA) and
- may not be the subject of proceedings before any court unless the Registrar (SBC) has certified in writing that mediation has failed to resolve the dispute or is unlikely to resolve the dispute, including where the Registrar (SBC) is satisfied that any party to the dispute has refused to take part in or has withdrawn from mediation of the dispute.
Under the CA, a landlord may not, without written certification from the SBC that mediation offered to be conducted by the SBC has failed to resolve the dispute, including reasons for the failure:
- seek to recover possession of the premises
- terminate the lease or
- exercise or enforce any other right of the landlord under the lease.
Under both the RLA and the CA, any court to which a dispute is referred is to have regard to the leasing principles set out in the Code when considering whether to make a decision or order with respect to:
- the recovery of possession of premises from a tenant
- the termination of a commercial lease by a landlord and
- the exercise or enforcement of any other rights of a landlord under a commercial lease.
Key points to take away
- Nothing in the Regulation stops a landlord and tenant from negotiating and agreeing on their own arrangements, including agreement as to the landlord taking any prescribed action or the parties agreeing to terminate the lease. In those instances, we recommend that any such arrangements be properly documented and executed by all parties.
- What is ‘good faith?’ ‘Good faith’ is not defined in the Regulation, but generally speaking is a presumption that the parties will cooperate (in this case to achieve the principles of the Code) and in doing so will:
- act honestly and not arbitrarily; and
- act reasonably having regard to the interests of the other party, without being obliged to subordinate their own interests.
- The obligation to negotiate in good faith may require each party to provide the other with evidence, including financial information, showing how they have been impacted by COVID-19. Any party preparing to enter negotiations over their lease should accordingly have this information to hand to assist in good faith negotiations.
- The Regulation does not address how, where a lease expires before the end of the prescribed period (or the pandemic), a landlord can retain the contractual right to recover deferred rent. In such cases, landlords should ensure that the tenant’s obligation to repay any deferred rent is separately documented, preferably including security to which the landlord may have recourse if the tenant does not meet its deferred rent obligations. Alternatively, the landlord and tenant could agree to extend the term of the lease proportionately to allow for repayment of the deferred rent.
- The principle under the Code allowing for any repayment period to include a reasonable time following the pandemic for businesses to get back to normal operations, etc, is not replicated in the Regulation, which may lead to uncertainty when determining how, or how soon, deferred rent and other payments are to be repaid following the ‘prescribed period’ and/or the pandemic.
- The Code expresses an expectation that landlords will work with their banks to share the burden, and then on-share with tenants any relief which may be afforded to them by their bank. This principle is not replicated in the Regulation, which makes no reference to banks and/or other financial institutions having a role to play.
Note that whilst the Regulation prohibits landlords from imposing any fees, interest or charges with respect to unpaid rent, the banks are not similarly constrained with respect to loan deferral arrangements (and the announcements thus far from the banks indicate that interest will continue to accrue through any deferral period).