Court hands down first decision on relief against forfeiture during COVID-19 period

In brief - a recent decision of the NSW Supreme Court in Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd [2020] NSWSC 996, sheds light on how the courts may determine applications for relief against forfeiture of a retail lease in light of the COVID-19 pandemic

Background

The lessee, being the plaintiff, operated a luxury sneaker and streetwear business out of the retail premises owned by the lessors. The lease had been assigned to the lessee in 2015, and they had provided a bank guarantee of 10 months' rent. The landlord had a right of re-entry if rent was in arrears for more than 14 days.

The lessee had consistently paid rent late throughout the entire lease term, which had resulted in five formal notices to remedy issued by the landlord between May 2017 and October 2019. By March 2020, the lessee was two months behind on rent.

On 25 March 2020, in response to mandatory restrictions placed on non-essential gatherings and services, the lessee temporarily ceased trading and removed stock and equipment to its warehouse in Melbourne to facilitate online trading. On the same day, the landlord gave notice of their re-entry to the premises and termination of the lease, on the basis of late rent and abandonment of the property. Importantly, the notice terminating the lease was served before the introduction of the National Code and the COVID-19 Regulation. 

The landlord called on the bank guarantee, which was released to them on 15 June 2020. The amount of the bank guarantee was more than the amount of the arrears claimed. 

Decision

The Court noted that, in principle, "where a lease is terminated for non-payment of rent, the Court will generally grant relief against forfeiture", which will be conditional on the tenant paying any outstanding rent and placing the landlord in the same position that it would have been in if there had been no default. In the Court's view, it is particularly relevant "that the landlord has alternative security such as a bank guarantee that may be required to be renewed".

The Court held that the real relevance of calling on the bank guarantee is that the lessors have already compensated themselves for all the consequences of the defaults to date, and still have money in hand. Further, it held that when the legislative COVID-19 relief regime is implemented, the lessors will have a substantially greater amount in hand than they have accepted is the case to date. 

Relief was granted to the lessee on the condition that the bank guarantee be fully reinstated. The Court also noted that the decision to grant relief was also justified, given that the default in payment, to some degree, was caused by the initial stages of the COVID-19 pandemic.

The Court found that the lessors erred in seeking to terminate on the basis of the lessee abandoning the premises. In light of the government restrictions that had been put in place, the lessee made a reasonable and credible "commercial decision" to remove stock for security reasons and to enable them to continue trading online.

Court provides guidance on the impact of the COVID-19 pandemic on terminating leases

The Court held that the COVID-19 regime that commenced in April 2020 was immaterial to the termination of the lease on 25 March. Interestingly, the Court acknowledged that relief against forfeiture would probably subject the lessor to the disadvantages that flow from the operation of the Code and the COVID-19 Regulations, but noted that "the regime is a product of a national agreement to deal with a once-in-a-century public health crisis, with the result that the Court should simply treat the consequences of the application of the COVID-19 regime as being a neutral factor in respect of how it may impact on one party or the other to a lease".

In discussing the principles governing a grant of relief against forfeiture, the Court noted that relief may be declined where the tenant would be incapable of meeting future rent payments, resulting in another termination of the lease. However, in discussing the lessee's economic prospects, the Court noted that the viability of many businesses at this time is "completely unknown", and that the application could not be based on "any forecast concerning the consequences of the COVID-19 pandemic".

Impact of the decision 

The key take-home points for lessors who may be considering terminating a retail or commercial lease for non-payment of arrears, include the following: 

1. If a lessor terminates the lease, the lessee may make an application to a court for relief against the forfeiture of the lease if the tenant pays those arrears. 

2. The lessor needs to assess if it holds a bank guarantee or other form of security, and if so, does it cover the amount of the arrears owing? If the amount of security held covers or exceeds the arrears and the lessor terminates the lease, the Court may make an order in favour of the lessee for relief against forfeiture, and require the tenant to replace the bank guarantee. 

3. In considering an application for relief against forfeiture, a court may consider a tenant's ability to continue paying rent in accordance with the lease. However, in the current economic climate, it may be difficult for a court to consider the unknown consequences of the COVID-19 pandemic on the economic viability of a retail enterprise. 

4. The Court did not consider the question on whether a lessor could terminate a lease for pre-COVID-19 breaches because the lease was terminated prior to the Code. However, the Court indicated that the position may have been different if the lessors had terminated the lease between the date of the adoption of the Code, and the date of commencement of the COVID-19 Regulation.