The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) commenced on 24 April 2020 (Regulation).
The Regulation is made under the Retail Leases Act 1994 (NSW) (Retail Act) and the Conveyancing Act 1919 (NSW) (Conveyancing Act). The purpose of the Regulation is to give effect to the leasing principles in the National Cabinet’s Mandatory Code of Conduct (Code of Conduct).
Who does the Regulation apply to?
In broad terms the Regulation applies to both retail and non-retail leases where the tenant is an ‘impacted lessee’, being a lessee:
that qualifies for the JobKeeper scheme; and
with a turnover of less than $50 million in the 2018–2019 financial year.
For the purpose of determining the lessee’s turnover:
turnover of a business includes any turnover derived from internet sales of goods or services;
if the lessee is a franchisee, the turnover relates to the lessee’s business conducted from the premises or land;
if the lessee is a corporation that is a member of a group (being related bodies corporate within the meaning of the Corporations Act 2001), the turnover is the group’s turnover; and
in any other case, the turnover relates to the lessee’s business.
However, the Regulation does not apply to:
a lease entered into after 24 April 2020 (except if entered into by an option to extend or renew the lease or any other extension or renewal of an existing lease on the same terms as the existing lease); or
a lease under the Agricultural Tenancies Act 1990 (NSW).
What are the provisions relevant to lessors and lessees?
The Regulation introduces the following key measures:
The relief measures apply during the ‘prescribed period’ starting on 24 April 2020 and ending on 23 October 2020.
Prescribed actions moratorium
Lessors cannot take ‘prescribed actions’ (defined below) for breaches during the prescribed period consisting of:
a failure to pay rent or outgoings; or
the business operating under the lease not opening for business during the hours specified in the lease.
Prescribed actions include any of the following:
exercising rights of re-entry, evicting the lessee from the premises or otherwise taking possession of the premises;
terminating the lease;
claiming damages from the lessee;
requiring payment of interest or other fees on unpaid rent;
calling on any security bond or bank guarantee;
enforcing any other guarantee given under the lease; and
exercising any other remedy otherwise available to a lessor against a lessee at common law or under the law of New South Wales.
Acts or omissions
Acts or omissions required under a law of the Commonwealth or New South Wales in response to the COVID-19 pandemic:
are not a breach of the lease; and
do not constitute grounds for termination of the lease (or taking of any other prescribed action).
Freeze on rent increases
Rent cannot be increased during the prescribed period (other than turnover rent). A lessor cannot, after the prescribed period, take any prescribed action in respect of a failure to pay the amount by which the rent is increased.
If a lessor receives a reduction in the costs of insurance, land tax or any other statutory charges (such as local council rates), a tenant’s liability to pay such amounts is reduced to the same extent.
Obligation to renegotiate rent and other terms of leases:
If an impacted lessee is a party to a lease, any party to that lease may request renegotiation of the rent and other terms.
If requested, a party to a lease must negotiate the rent and other terms of the lease in good faith.
The parties must renegotiate the rent and other terms of the lease having regard to: (i) the economic impact of the COVID-19 pandemic; and (ii) the leasing principles set out in the Code of Conduct.
A lessor must not take or continue any prescribed action against an impacted lessee if the lessee fails to pay rent during the prescribed period unless the lessor has complied with the obligation to negotiate.
If there is:
a dispute concerning liabilities and obligations, including obligations to pay money, which arose under the lease concerning circumstances occurring during the prescribed period;
a dispute regarding renegotiation of rent; or
a failure to take part in renegotiation.
The dispute resolution provisions of the Retail Act will apply as if the dispute was a retail tenancy dispute within the meaning of that Act and either party may refer the dispute for mediation of the dispute.
The Tribunal and any court must have regard to the leasing principles in the Code of Conduct in making any decision or order relating to the recovery of possession of premises, termination of a commercial lease and the exercise or enforcement of another right of a lessor of premises or land.
However, in relation to non-retail leases, there is no right for a lessee to refer any dispute for mediation. However, a lessor must not institute court proceedings to recover possession of the premises or terminate the lease or exercise any other rights under the lease unless and until the Small Business Commissioner has certified in writing that mediation has failed to resolve the dispute or the court is otherwise satisfied that mediation is unlikely to resolve the dispute.
Non COVID-19 reasons
The lessor is not prevented from taking a prescribed action for reasons unrelated to the economic impacts of the COVID-19 pandemic.
The Regulation does not prevent the parties agreeing to any action in relation to the lease (including the lessor taking any prescribed action or the parties agreeing to terminate the lease) but the lessor cannot unilaterally take any such action.
Equity and law
Common law and equity may continue to be applied in the determination of a dispute concerning the exercise or enforcement of the lessor’s rights, including recovery of possession of the premises and termination of a commercial lease.
What if the lessee is not an ‘impacted lessee’ but has refused to pay rent?
A lessee who is not an impacted lessee is not entitled to any protection under the Regulation and the lessor is not prevented from enforcing its rights under the relevant lease. However, lessors and lessees are encouraged to have regard to the Code of Conduct where possible to guide them in any negotiations they wish to undertake.
The relief measures prescribed by the Regulation apply generally to both retail leases and non-retail leases (other than a lease under the Agricultural Tenancies Act 1990 (NSW).
The Code of Conduct was directed to small and medium sized enterprises with an annual turnover of less than $50 million per year. The Regulation adopts the same approach but further clarifies that: (i) the relevant turnover is the turnover for the 2018-2019 financial year; (ii) internet sales are to be included in turnover. Unlike the Retail Act, which includes revenue from online transactions in a lessee’s turnover only if those transactions were derived from goods or services delivered or provided from or at the retail shop (or the retail shopping centre of which the shop forms part of or where transactions were made when the customer was at the retail shop), the Regulation does not seek to make that distinction; and (iii) lessees who operate ‘not for profit’ businesses may be an impacted lessee.
A lessee whose turnover exceeded $50 million in the 2018-2019 financial year will not be entitled to any protection. It is unclear whether a lessee who had no turnover in that period would be entitled to the protection under the Regulation (for example a lessee who took over the lease pursuant to an assignment effected after 1 July 2019).
A lease entered into after 24 April 2020 will not be entitled to the protection of the Regulation, unless that lease was a renewal under an option, or any other renewal on the same terms as the existing lease. It is not clear to what extent that a renewed or extended lease which is not on the ‘same terms’ as the existing lease will be excluded from the operation of the Regulation. For example, if the parties agree after 24 April 2020 to extend the term of a lease (which does not contain further options) but do so subject to the impositions of new terms such as rent-free periods or fitout incentives, consideration needs to be given to whether that extended lease will fall within the Regulation.
Lessors are not obliged to pass on any reduction in statutory outgoings and insurance premiums to lessees unless the lease requires the impacted lessee to pay a fixed amount that represents these charges. Lessees of gross leases, for example, may not be entitled to any land tax savings that the lessor may be entitled to.
Lessors must not take, or continue to take, any prescribed action against an impacted lessee in respect of a failure to pay rent during the prescribed period unless the lessor has complied with its obligations under the Regulation to renegotiate the rent. It would appear that to the extent a lessor has not taken any prescribed action for a failure to pay rent before 24 April 2020, it is now prohibited from doing so, even if the rent arrears relate to a period before 24 April 2020.
The lessor may take a prescribed action during the prescribed period on grounds not related to the economic impacts of the COVID-19 pandemic. For example, the lessor may terminate the lease if the lessee has damaged the premises (subject to the lessor giving any notices required under law or the lease). The lessor may also take action to recover the premises if the lessee fails to vacate the premises at the end of the fixed term.
An impacted lessee under the Retail Act may apply to the Small Business Commissioner for mediation where the lessor refuses to take part in renegotiation of rent or other terms of the lease, or where there is a dispute in respect of rights and obligations under the lease concerning circumstances occurring during the prescribed period.
While the Regulation does not confer any corresponding rights for impacted lessees under the Conveyancing Regulation to apply for mediation, a lessor must not seek to recover the premises, terminate the lease or exercise any other rights under the lease until the Small Business Commissioner has certified in writing that mediation has failed.
Arguably, a guarantor who is a party to a lease may be able to compel the lessor to enter into rent renegotiations as long as the lessee is an impacted lessee.
If a rent review occurs during the prescribed period, not only is a lessor prevented from increasing the rent in accordance with the rent review during the prescribed period, the lessor is also prevented, after the end of the prescribed period, from recovering the amount by which the rent would have increased during the prescribed period.
Many landlords have delayed dealing with lessee requests for rent waivers pending release of the Regulations. There will now be significant pressure to finalise and document such arrangements. We have a suite of standard documents available for this process and will provide more details on request.
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If you would like to discuss the contents of this article or have any questions about the impact of current events on your business, please contact John Frangi, Partner (email@example.com), Marcus Cutchey, Partner, (firstname.lastname@example.org) or Brendan Ivers, Partner, (email@example.com).