NSW’s COVID-19 Relief Measures for Commercial Tenants

As indicated in our April Newsletter, we outline below the NSW Government’s recent response to the Australian Government’s National Cabinet Code of Conduct (Code) in respect of retail and commercial leases in the wake of COVID-19. The Code applies to small and medium-sized tenants suffering “financial stress or hardship” because of COVID-19, applicable where the tenant has an annual turnover of up to $50 million and is eligible for the national JobKeeper programme.

On 24th April 2020, the NSW Government passed legislation giving immediate effect to the Code and its COVID-19 relief measures.

The Code of Conduct

The Australian Government’s National Cabinet Code of Conduct was issued on 7th April 2020. The objective of the Code is to share, in a proportionate and measured manner, the financial risk and cash flow impact to the parties during the COVID-19 period, while balancing the interests of tenants and landlords. Included in the Code are some “overarching principles”, such as arrangements requiring the parties to discuss and negotiate any temporary leasing arrangements, to negotiate in good faith and act in a manner that is open, honest and transparent.

The NSW Regulations

Following the announcement of the Code, NSW became the first State to introduce comprehensive implementation regulations. The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulations) are operative from 24th April 2020 for six months.

Who do the Regulations apply to?

The Regulations apply to commercial leases for premises, including most retail shop leases, entered into before 24th April. They do not apply to agricultural leases or leases entered into after 24th April. The exception to this cut-off date is for leases entered into following the exercise of an option or renewal of an existing lease after this date.

The Regulations only apply to those tenants who are “impacted lessees”, meaning those organisations that qualify for the Commonwealth JobKeeper scheme and whose annual turnover is less than $50 million (based on figures for the 2018-19 financial year). If the tenant is part of a group of companies, the turnover of the group applies. Turnover can include internet sales of goods or services.

For tenants not covered by the Code, it is expected that its “spirit” should apply to all leasing arrangements for affected businesses.

Key provisions relating to “impacted leases”

The key provisions affecting the relationship between landlord and tenant under the Regulations are as follows:

(i) Prohibition of landlords’ rights to enforce terms

If an “impacted lessee” is in breach of their obligations during the prescribed period because of a failure to pay the rent, to pay other outgoings, or to be operating and open during the specified hours in the lease, the landlord will not be able to seek orders or issue legal proceedings. The prohibited actions include termination, eviction, forfeiture, taking possession of the premises, or calling on a guarantee.

(ii) Renegotiating rent and other lease terms

If impacted, a tenant can seek to renegotiate, in good faith, the rent and other terms of the lease based on the economic effect of the pandemic. A tenant is entitled to negotiate a rent reduction proportionate to the reduction in turnover by way of a waiver or deferral. Financial records can evidence this. The landlord must waive at least 50% of the reduction and the balance deferred with payments over at least 24 months.

The Regulations prevent an impacted tenant’s rent being increased except where the rent is determined by reference to turnover. It also requires a landlord to pass on proportionately reductions in their fixed costs such as land tax or insurance.

Landlords may themselves be facing financial issues caused by the COVID-19 pandemic. No further protections are provided in the Regulations. However, in renegotiations, both parties should have regard to the pandemic’s economic impact and the principles set out in the Code. These require consideration being paid to the landlord’s ability to agree to a waiver of rent.

Dispute resolution

(i) Covid-19 related disputes

There is an expectation of binding mediation to resolve disputes. Under the Regulations, the approach depends on whether the lease is a retail lease or not. If the lease is a retail lease, it will be treated as a tenancy dispute under the NSW Retail Leases Act. Where the impacted lease is not a retail lease, the Regulations set out freestanding mediation requirements with the Office of the Small Business Commissioner.

(ii) Non-COVID-19 related disputes

If a tenant’s breach has nothing to do with COVID-19, such as damaging the premises or failure to vacate the premises after the expiry of the lease, a landlord can contemplate taking legal action. Tenants, therefore, need to remain aware of their obligations to comply with the other terms of their lease.

What impact will these Regulations have?

The Regulations provide added clarity in respect of impacted lessees and their landlords. They give effect to the principles in the Code aimed at giving some financial relief to the commercial property sector.

In essence, for the duration of the Regulations, landlords will not be able to take enforcement action against qualifying tenants for the non-payment of rent and certain other breaches. Should the landlord wish the tenant to pay some rent, the landlord must engage in good faith with the tenant to agree on a revised rent. Reductions in rent and other terms must be still documented adequately.

For leases not covered by the Regulations, it is still likely that both landlords and tenants may still want to consider renegotiation to support the current and future viability of the parties.

Contact our Commercial Property Lawyers, Sydney NSW

If you are a commercial or retail landlord or tenant, with concerns about what the new Regulations mean for you, Szabo & Associates Solicitors are here to help. Please contact us on (02) 9158 6333 or fill in the online contact form.