On Saturday, 25 April 2020, the NSW Treasurer Dominic Perrottet and NSW Minister for Finance & Small Business, Damien Tudehope, confirmed new regulations published in New South Wales will give immediate effect to the NSW Government’s COVID-19 rental relief measures, endorsing the Federal Government’s National Cabinet’s Code of Conduct released on 7 April 2020.
The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (the Regulation) is made under the Retail Leases Act 1994 (NSW) and the Conveyancing Act 1919 (NSW). The amendments to the Conveyancing Act 1919 (NSW) amend the Amendment of Conveyancing (General) Regulation 2018 (NSW) in order to capture relevant non-retail commercial leases.
The Regulation is stated to be in effect for 6 months from 24 April 2020 and provides that it is repealed on 25 October 2020.
What has happened?
The NSW Government released the Regulation to give effect to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID‑19 (the Code) adopted by the National Cabinet on 7 April 2020.
Broadly speaking, the Code imposed a set of good faith principles for application to commercial tenancies (including retail, office and industrial) between owners/ operators/ other landlords and tenants. Under the Code, eligible tenants will be entitled to request rent reductions in the form of waivers and deferrals from their landlords. The Code applies to all small‑medium enterprise tenancies that are suffering “financial stress or hardship” (as that term is defined in the Code) as a result of the COVID‑19 pandemic, where the tenant:
- is eligible for the Commonwealth Government’s JobKeeper program; and
- has an annual turnover of up to $50 million.
(See Gilbert + Tobin’s Guide to the Mandatory Code of Conduct for commercial rent relief published on 9 April 2020 for an overview of the Code and its implications for commercial tenants and landlords).
In particular, the Regulation:
- prohibits and regulates the exercise of certain rights of landlords relating to the enforcement of certain commercial leases during the pandemic period; and
- requires that landlords and tenants who are subject to the Regulation negotiate the rent and other terms of those commercial leases in good faith having regard to the leasing principles set out in the Code, before any legal enforcement action of the terms of those commercial leases may be commenced.
The Regulation - key updates
Which leases are affected?
The Regulation applies to ‘commercial leases’, being:
- a retail shop lease (as defined in the Retail Leases Act 1994 (NSW) (RLA); and
- any agreement relating to the leasing of premises or land for commercial purposes,
but does not include:
- a lease entered into after 24 April 2020 (when the Regulation came into effect), although it will capture leases entered into due to an exercise of option or renewal of an existing lease after this date; or
- a lease under the Agricultural Tenancies Act 1990 (NSW) which governs the rights of agricultural landowners, tenants and sharefarmers.
It is important to note that the definition of ‘retail shop lease’ under the RLA includes any agreement where a person is granted a right of occupation of premises to use premises as a retail shop. A lease may be a retail lease under the RLA irrespective of whether the tenant has a right of exclusive occupation, whether the agreement is express or implied or whether the agreement is oral or in writing. This means that licences and other agreements which on their face may not look like a lease are captured by the RLA and may fall within the effect of the Regulation.
Who is caught by the Regulation?
The Regulation provides relief to ‘impacted lessees’, being tenants who:
- qualify for the Commonwealth Government’s JobKeeper scheme; and
- have a turnover in the 2018–2019 financial year of less than $50 million, noting that turnover is defined as follows:
- if the tenant is a franchisee - the turnover of the business conducted at the premises or land concerned,
- if the tenant is a corporation that is a member of a group* - the turnover of the group, or
- in any other case - the turnover of the business conducted by the tenant,
* the Regulation provides that corporations constitute a ‘group’ if they are related bodies corporate within the meaning of the Corporations Act 2001 (Cth). The Corporations Act states that a where a body corporate will be related to a second body corporate if it is:
1) the holding company of another body corporate;
2) the subsidiary of another body corporate; and / or
3) the subsidiary of a holding company of another body corporate.
Does the Regulation extend to arrangements between sublandlords and subtenants?
The Regulation does not prohibit sub-tenants from relying on the protections afforded by the Code. Accordingly, there may be circumstances where a sublandlord does not qualify for relief under its head lease, but is required to give concessions to its eligible subtenant.
What are the new prohibitions and restrictions under the Regulation?
Prohibition on legal action
If in New South Wales an ‘impacted lessee’ is in breach of its commercial lease during the pandemic period due to:
- a failure to pay rent, or
- a failure to pay outgoings, or
- the business operating under the lease is not open for business during the hours specified in the lease,
then the landlord will be prohibited seeking orders or issuing proceedings in a court or tribunal for certain actions, including but not limited to :
- eviction of the tenant from the premises or the land;
- exercising a right of re-entry to the premises;
- detaining goods;
- forfeiture of the lease;
- seeking damages;
- drawing down on the tenant’s security bond;
- possession of the premises; or
- termination of the lease.
Given that a significant percentage of turnover comes from online sales, the Regulation recognises and clarifies that turnover includes turnover from internet sales or services.
Prohibition on rent increases
Where a tenant is an ‘impacted lessee’ as discussed above, the landlord is prohibited from increasing the rent payable under the commercial lease during the pandemic period. However, the Regulation does not prohibit landlords from recovering an increased rent amount where that rent is determined by reference to turnover.
After the pandemic period, landlords are prohibited from taking any legal action against the tenant on the grounds of a breach of the lease due to a failure to pay an amount equivalent to the rent increase that would have ordinarily been payable, if not for the application of the Regulation.
What obligations exist to re‑negotiate rent and other terms?
Under the Regulation, landlords are prohibited from taking or continuing any legal action against a tenant on grounds of a breach of the lease for failure to pay rent during the pandemic period, unless the landlord has complied with certain conditions set out under the Regulation, including:
- engaging in good faith negotiations with the tenant in relation to renegotiations of the rent and other terms of the lease, if a party to the lease requests such renegotiation; and
- have regard to the economic impacts of the COVID‑19 pandemic and the leasing principles set out in the Code (leasing principles 3‑5, 7‑10 and 12).
For example, before a landlord may commence any form of legal action or order, principle No. 3 of the Code requires the landlord to first offer rent reductions in the form of waivers or deferrals of rent, proportionate to a tenant’s reduction in turnover.
Landlords may wish to request that tenants they are negotiating with pay any rent arrears arising before the date the Regulations came into effect, as a condition to entering into any variations to reduce the rent or vary other terms.
Disputes must be submitted to mediation before proceedings can be taken
Any disputes relating to re‑negotiating rent payable or other terms of the lease must first be submitted to mediation before legal proceedings can be taken. Landlords may not attempt to recover possession of premises or land under the lease, terminate the lease or, exercise or enforce any other right of the landlord under the lease, until the dispute has been mediated, and the failure of that mediation has been recognised and recorded by the Small Business Commissioner.
Action for non-COVID-19 pandemic related reasons
Although the Regulation severely impedes the ability or recourse a landlord may have to enforce its rights under an eligible lease, the Regulation itself specifies that there is nothing to prevent a landlord from taking legal action or seeking an order on grounds unrelated to the economic impacts of the COVID-19 pandemic.
By way of example, a landlord may terminate a commercial lease if the tenant has breached the lease by damaging the premises and not rectifying the breach, or may take action if its tenant fails to vacate the premises following the expiry of a fixed term commercial lease.
While the Regulation appears to enforce a broad prohibition on a landlord’s ability to take action for breach, this is not the case and tenants need to remain aware of their obligations to otherwise comply with the terms of their leases.