Tenant evicted for failure to pay rent: pre-pandemic breach not covered by COVID-19 rent relief leasing changes, NSW Supreme Court finds

Background: leases terminated, possession granted to new lessees

MIR Holdings Pty Ltd and SKRG Pty Ltd operated various restaurants in Marina Square shopping centre at Wentworth Point under registered leases with their landlord, Marina Square Retail Pty Ltd.

On 11 September 2020, the landlord served Notices of Breach of Covenant pursuant to s129 of the Conveyancing Act 1919 (NSW) on MIR Holdings and SKRG for non-payment of certain amounts due under their respective leases, including rent, for the period up to 31 March 2020. The Notices required payment of the outstanding amounts within 14 days.

MIR Holdings and SKRG failed to pay the outstanding amounts within the time required. On 1 October 2020, the landlord served notices of termination and re-entry on MIR Holdings and SKRG for failing to comply with the Notices of Breach of Covenant. Importantly, the landlord then handed over possession of the retail premises to new lessees under lease agreements dated 31 August 2020 and 21 September 2020.

On 2 October 2020, MIR Holdings and SKRG brought an application seeking relief against forfeiture on an interlocutory and final basis. The interlocutory application was initially dismissed by Justice Rein on the same day. On 13 October 2020, MIR Holdings and SKRG renewed their application for interlocutory relief before Justice Stevenson.

Decision: relief refused

MIR Holdings and SKRG argued that the landlord’s taking of possession was contrary to clauses 5 and 6 of the NSW COVID-19 Regulations which prohibited landlords from evicting retail tenants on the grounds of a breach of a commercial lease ‘during the prescribed period’, being the period between 24 April 2020 and 31 December 2020.

Justice Stevenson refused to grant the relief sought by SKRG and MIR Holdings on the basis that:

• the grant of relief via a reinstatement of the lease would negatively impact the new lessees who were in possession of the premises and had an unconditional entitlement to occupy it pursuant to the terms of their respective leases;
• there was no evidence that the new lessees were aware of the claim for relief against forfeiture being brought by MIR Holdings and SKRG and the new lessees had not been joined to the proceedings (despite Justice Rein’s observations that they likely should be), which meant the new lessees had not been heard in relation to the dispute;
• the provisions of the NSW COVID-19 Regulations prohibiting landlords from evicting tenants did not apply to breaches that occurred prior to the commencement of these regulations on 24 April 2020; and
• in any event, the claim for relief against forfeiture was unlikely to have been granted as MIR Holdings and SKRG were persistently and significantly in default of their leases.

Key takeaways for retail tenants

Any outstanding breaches which occurred prior to the pandemic period – such as failure to pay rent due in or before March 2020 – should be remedied as soon as possible. Otherwise, the tenant risks eviction and may face a claim by the landlord for damages suffered as a result of the breach of the lease.

If a tenant is evicted before the end of the pandemic period and is considering seeking relief against forfeiture, that tenant should consider:

• whether the relevant breach occurred during the ‘prescribed period’ as defined in the NSW COVID-19 Regulations and whether the no-eviction protection applies in relation to the breach;
• the nature and extent of the breach, and what evidence can be gathered to demonstrate the tenant’s ability to remedy the breach and then carry on with the lease, which will inform the court’s decision as to whether to exercise its discretion to grant the claim for relief; and
• the impact of their claim for relief on any third parties such as new lessees, and whether those parties should be joined to any proceedings for relief against forfeiture.

The precedent established by Justice Robb’s decision in the Sneakerboy case does not fetter the court’s discretion to refuse a similar claim for relief against forfeiture during the COVID-19 pandemic period. The Court will deal with each claim on a case by case basis.

To avoid uncertainty in relation to their lease, commercial tenants should use their best efforts to agree on renegotiated terms of their leases with their landlords before 31 December 2020. Hall & Wilcox is available to assist both landlords and tenants with any commercial leasing disputes under the COVID-19 Regime.

[1] In New South Wales, the COVID-19 Regime is comprised of the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (National Code of Conduct) and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW COVID-19 Regulations).