In brief - the NSW Government has released its regulations to apply the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles During COVID-19 (the Code) in NSW
The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the Regulation) imposes separate regulations in respect of retail and commercial leases. The retail and commercial regulations are largely consistent, save for some minor variations and the dispute resolution sections.
What do the Regulations mean for landlords and tenants?
The Regulations are aimed at providing relief for "impacted lessees", during the 6 month prescribed period which commenced on 24 April 2020 and extends to 24 October 2020.
The main points to take away from the Regulations are:
- lessors must not evict an impacted lessee, or terminate their lease;
- lessors must not call on any security bond held under a lease;
- there will be no rent increases for an impacted lessee;
- parties to a commercial lease must, if requested, renegotiate the rent and other terms in good faith having regard to the economic impacts of COVID-19 and the leasing principles set out in the Code (including rental waivers and rent deferrals);
- disputes must be determined by mediation;
- a court (or tribunal in respect of retail leases), when making a decision relating to the recovery of possession, termination, or exercise of another right of the lessor, must have regard to the leasing principles in the Code; and
- a lessee's act or omission that is required by State or Commonwealth law in response to the COVID-19 pandemic is not taken to be a breach of a commercial lease and does not constitute grounds for termination.
What leases do the Regulations capture? Are there any exclusions?
The Regulations apply to commercial leases and retail shop leases (as defined in the Retail Leases Act 1994, which also extend to licences captured by this definition). The definition in the Regulations excludes leases:
- entered into after the commencement of the prescribed period (excluding option leases or an extension or renewal of an existing lease on the same terms which are captured by the regulations); and
- under the Agricultural Tenancies Act 1990.
The Regulations do not deal with licences (other than as noted above in relation to retail shops).
The definition of 'lessor' and 'lessee' is broad enough to capture sublease arrangements.
Our view is that the Regulations will only apply to breaches on and from 24 April 2020 because the Regulations apply to the enforcement of rights in relation to circumstances occurring during the prescribed period (which would exclude circumstances before and after the prescribed period).
What is an "impacted lessee"?
An "impacted lessee" is a lessee who:
- qualifies for the JobKeeper scheme under sections 7 and 8 of the Commonwealth JobKeeper legislation; and
- had a turnover in the 2018-2019 financial year of less than $50 million, applied as follows:
(i) if the lessee is a franchisee, the turnover of the business conducted at the premises;
(ii) if the lessee is a corporation that is a member of a group, the turnover of the group; and
(iii) in any other case, the turnover of the business conducted by the lessee.
What is a "prescribed action"?
The Regulations set out a number of actions which are prohibited, labelled "prescribed actions". Prescribed actions include:
- eviction of the lessee from the premises;
- exercising a right of re-entry to the premises;
- recovery of the whole or part of a security bond;
- termination of the lease; and
- any other remedy otherwise available to a lessor against the lessee.
The Regulations do not prevent a lessor taking a prescribed action on grounds not related to the economic impact of the COVID-19 pandemic.
Prohibition on lessors exercising their rights and on rent reviews
Where there is an impacted lessee under a retail or commercial lease:
- a lessor must not take any prescribed action (eviction, termination, calling on security etc) on the grounds of the following breaches of the lease during the prescribed period:
(i) failure to pay rent;
(ii) failure to pay outgoings; or
(iii) the lessee's business not being open for business during the hours specified in the lease;
- the rent must not be increased, whether under the rent review provisions in the relevant lease or otherwise (it is unclear if scheduled rent reviews are waived or deferred); and
- where the impacted lessee is required to pay a fixed amount for land tax, other statutory charges (such as council rates) or insurance payable by the lessor and those amounts have been reduced, the lessor must pass on those savings to the lessee. There is, however, no exemption from paying such amounts if the lease requires payment by the lessee.
Renegotiating rent and "other terms"
A party to a commercial or retail lease must, if requested, renegotiate the rent payable and other terms under the lease in good faith. It is unclear from the wording of the Regulations whether the obligation to renegotiate rent and other terms in good faith applies to:
- impacted lessees only; or
- all parties of any commercial or retail lease.
Our view is that the intention of obligation to renegotiate applies to impacted lessees only. An unaffected lessee may seek to renegotiate relying on the Regulations, but when applying the principles of good faith, it is unlikely that an unaffected lessee would be successful in any attempt to renegotiate (depending of course, on the individual circumstances) because the Code specifically applies to impacted lessees.
When renegotiating the rent and other terms, the parties must have regard to:
- the economic impacts of the COVID-19 pandemic; and
- the leasing principles in the Code.
As noted in our previous update on the Code, lessors must offer impacted lessees:
- proportionate reductions in rent payable in the form of waivers (being rent abatement) and deferrals of rent of up to 100% of the rent payable, based on the reduction in the lessee’s trade; and
- in respect of rental waivers (rent abatement), such waivers must constitute a minimum of 50% of the total reduction in rent payable over the pandemic period and should constitute a greater proportion of the total reduction in rent payable.
The Regulations are very broad when referring to "other terms". This might include, for example, renegotiating obligations such as redecoration obligations mid-term, or make good obligations at the end of a term. While providing further flexibility, this could also delay the parties finalising agreements for payment relief.
Dealing with disputes - time to mediate
As foreshadowed in the Code, dispute resolution will be conducted by way of mediation.
Commercial (non-retail) leases
On a strict reading of the section relating to commercial (non-retail) disputes, it would appear that a landlord to a commercial lease cannot:
- seek to recover possession of the premises;
- terminate the lease; or
- exercise or enforce any other right under the lease, unless the Small Business Commissioner has certified that mediation has failed to resolve the dispute.
This provision appears to capture only commercial leases (as defined), but arguably may be read as being wider than applying to 'impacted lessees' under a commercial lease.
In addition, for disputes relating to matters falling within the Regulation, a court or tribunal (in relation to retail leases) must have regard to the leasing principles in the Code when making a decision or order regarding the recovery of possession, termination, or exercise or enforcement of a right of a lessor under a commercial lease.
The main differences between commercial (non-retail) and retail leases under the Regulations are the dispute resolution provisions. For retail leases, the Regulations extend the application of Part 8 of the Retail Leases Act 1994 (NSW) to an "impacted commercial lease dispute" as if it were a retail tenancy dispute, which includes:
- any dispute concerning the liabilities or obligations between 24 April 2020 and 24 October 2020 under a retail shop lease if the lessee is an impacted lessee; and
- a dispute regarding a renegotiation (or failure to take part in a renegotiation) of rent payable under the retail shop lease, if the lessee is an impacted lessee.
Questions and issues arising from the Regulations
There are a number of issues arising from the Regulations which will require further clarification and will undoubtedly be subject to further debate. We expect that over the coming weeks and months we will receive updated guidance, and will also begin to see how the Small Business Commissioner, the tribunal and the courts interpret the Regulations and apply the Code. We will provide further guidance as and when this becomes available.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.