New South Wales has now implemented regulations to assist in renegotiating the terms of commercial leases where lessees have been impacted by COVID-19. The regulations were passed under the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (the Regulation) and came into effect on 24 April 2020. They will cease to have effect in 6 months’ time, on 24 October 2020.
The Regulation brings into effect in New South Wales, the Australian Government’s National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (the Code) which provides guiding principles for the States and Territories to reflect in legislation, for negotiating temporary amendments to commercial leasing arrangements and providing cashflow relief to certain lessees, during the COVID-19 pandemic and for a reasonable recovery period afterwards. For more information on the Code, see ‘Potential rental relief for Not for Profit Organisations’ and ‘COVID-19: Guide to mandatory code of conduct for commercial rent relief’.
The information set out below is intended as a broad guide to help determine:
- Whether your organisation is eligible to negotiate temporary rental relief (and receive other protections) pursuant to the Regulation; and if so,
- What terms can be negotiated and amended.
This fact sheet does not include all detail of the Regulation. If you think the Regulation may apply to your organisation, you should seek legal advice to determine the extent of the Regulation’s impact for your organisation’s particular circumstances.
Does the Regulation apply to your organisation’s tenancy?
The Regulation applies to “impacted lessees”. Your organisation will be an “impacted lessee” if:
- Your organisation qualifies for the Australian Government’s JobKeeper scheme; and
- Your organisation’s turnover (as a corporate group) was less than $50 million in FY2018-19.
Does your organisation qualify for the JobKeeper scheme?
Your organisation qualifies for the JobKeeper scheme if:
- On 1 March 2020, your organisation carried on a business in Australia, or was a non-profit body that pursued its objectives principally in Australia; and
- Your organisation satisfies the “decline in turnover” test.
Your organisation will have satisfied the “decline in turnover” test if your organisation’s GST turnover has fallen by the relevant amount during your organisation’s relevant comparison period. The relevant reductions in GST turnover are:
- At least 15% shortfall for an ACNC-registered charity no matter what the turnover; or
- At least 30% if your organisation’s turnover is less than $1 billion.
The turnover test period is either a calendar month that ends after 30 March 2020 and before 1 October 2020, or a quarter that starts on 1 April 2020 or 1 July 2020.The relevant comparison period is the period in 2019 that corresponds to the turnover test period.
Use our decision map for a quick determination of your organisation’s eligibility. Our decision map can be found here.
What if my organisation has no employees?
Your organisation may qualify for the JobKeeper scheme despite not having any eligible employees for the JobKeeper payment.
How does the Regulation help my organisation?
Renegotiating Rent and Terms of the Lease
If the Regulation applies to your organisation, it can seek to renegotiate rent and other terms of your organisation’s commercial lease in accordance with the parameters set out in the Regulation. Any renegotiation must be done in good faith.
The foundation for any renegotiation of an impacted lease is the extent of the economic impact of the COVID-19 pandemic on your organisation, along with the Principles set out in the Code. The following Principles, adopted by the Regulation, are likely to be the most significant in any organisation’s negotiations:
Principle under the Code |
What does it mean for my organisation? |
|---|---|
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Proportionate reductions in rent (Principle 3 under the Code) |
Your organisation is entitled to renegotiate a reduction in rent that is proportionate to the reduction in your organisation’s trade during the COVID-19 pandemic period. For example, if your organisation has experienced a 30% reduction in trade, your organisation is entitled to 30% cashflow relief. Reductions in rent are available through rental waivers and rental deferrals. You should be prepared to substantiate your organisation’s reduction in trade with appropriate financial data and business records. |
|
Rental waivers (Principle 4 under the Code) |
Your organisation is entitled to renegotiate at least half of your organisation’s rent reductions to be provided through rental waivers. A rental waiver means that your organisation will never need to pay the amount waived. For example, if your organisation has experienced a 30% reduction in trade, a minimum of 15% of your rental relief must be provided through a rental waiver. |
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Rental deferrals (Principle 5 under the Code) |
Your organisation is entitled to have the rest of your organisation’s rent reductions provided through rental deferrals. Your organisation will eventually need to pay back to amount deferred. For example, if your organisation has experienced a 30% reduction in trade, a maximum of 15% of your rental relief can be provided through a rental deferral. |
|
Landlords sharing benefits (Principle 7 under the Code) |
Where your organisation’s landlord receives a benefit from the deferral of loan repayments provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other deferral of loan repayments, the benefit should be shared with your organisation in a proportionate manner. |
|
Waiving other expenses (Principle 8 under the Code) |
Your organisation’s landlord should seek to waive any other expense or outgoings payable by your organisation under lease terms while your organisation is not able to trade. For example, this may include utilities, council and water rates, body corporate fees and insurance. However, it is important to note that the landlord reserves the right to reduce such services as required. |
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Repayment (Principle 9 under the Code) |
If any negotiated arrangements require repayment by your organisation, repayment should occur over an extended period of time so that your organisation is not faced with undue financial burden. Repayment should not commence until either the COVID-19 pandemic ends or the existing lease expires (whichever comes first). |
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Fees, interest and other charges (Principle 10 under the Code) |
Your organisation’s landlord should not charge fees, interest or other charges in relation to any rent waived or deferred. |
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Lease extension (Principle 12 under the Code) |
Your organisation should be provided with an opportunity to extend its lease so that your organisation has additional time to trade on existing lease terms. |
General Prohibitions and Restrictions on Commercial Leases
The Regulation also brings into effect a number of prohibitions and restrictions on commercial leases up until 24 October 2020, for example:
- Your organisation’s landlord must not increase your organisation’s rent;
- If your organisation fails to pay rent, your organisation’s landlord must not, for that reason, evict your organisation from the premises, exercise a right of re-entry to the premises, recover the premises, require a payment of interest or fee for unpaid rent, recover the security bond, terminate the lease, or issue proceedings in a court or tribunal against your organisation for failing to pay rent or outgoings; and
- If your organisation’s landlord is entitled to reduced payments for land tax, statutory charges (such as local council rates) or insurance, your organisation does not have to pay such charges to the extent of the reduction the landlord is entitled to.
However, any other lawful action to which your organisation is agreeable is permitted if also agreed by the landlord. For example, your organisation and your organisation’s landlord can agree to terminate the commercial lease.
It is important to note that your organisation’s landlord can take action against your organisation on grounds that are not related to the economic impacts of the COVID-19 pandemic. For example, your organisation’s landlord may terminate the lease if your organisation has breached the lease by damaging the premises or if your organisation fails to vacate the premises after the lease has expired.
What if my organisation’s landlord will not agree to rent reductions and renegotiated terms?
If your organisation has attempted to negotiate in good faith with your organisation’s landlord, but your organisation’s landlord will not agree to renegotiating rent and terms of your lease that you feel your organisation is entitled to, you are able to apply for mediation. If mediation fails to resolve the dispute, legal proceedings may be taken.
If your organisation finds itself in this position, your organisation should seek legal advice.
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