Sneakerboy decisions provide clarity on COVID-19 leasing changes as NSW Government extends regulation to 31 December 2020

Insights23 Sept 2020

Two recent decisions of the Supreme Court of NSW have clarified how the changes to the commercial leasing regime brought about by the COVID-19 pandemic will operate in practice.

The NSW Government today announced it will extend the operation of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW COVID-19 Regulation) to 31 December 2020.

The announcement gives commercial tenants and landlords further opportunity to renegotiate the terms of their leases. It also gives commercial tenants an opportunity to ask for additional rent relief if they can provide evidence of reduced trading during the pandemic period.

The announcement comes as two recent decisions of the Supreme Court of NSW have clarified how the changes to the commercial leasing regime in response to the COVID-19 pandemic will operate in practice. We examine those decisions in this article.

Background

Sneakerboy Pty Ltd operates a luxury retail store in Sydney’s Temperance Lane under a lease with its landlord, Georges Properties Pty Ltd.

On 25 March 2020, after Sneakerboy failed to pay rent, the landlord terminated Sneakerboy’s lease. The termination took place before the implementation of the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during Covid-19 on 7 April 2020 and the enactment of the NSW COVID-19 Regulation on 24 April 2020 (together, the COVID-19 Regime).

The landlord subsequently called upon a bank guarantee in the amount of $253,668.90, which was paid by the Commonwealth Bank to the landlord in full on 15 June 2020.

First decision: relief against forfeiture

Sneakerboy made an application for relief against forfeiture (an order that it be permitted to re-enter the premises and continue to occupy the premises under lease). Ordinarily, the Court will grant relief against forfeiture if a tenant is able to rectify its breach by paying any unpaid rent and demonstrating the capability of making future payments.

Based on these general principles, Justice Robb granted the relief sought by Sneakerboy as the landlord had already compensated itself by calling on the bank guarantee as repayment of the unpaid rent.

In his judgment His Honour dealt with the peculiarities of the COVID-19 Regime, finding that:

The COVID-19 pandemic, something Sneakerboy is not responsible for, had a significant impact on Sneakerboy’s default in the payment of rent;
Upon reinstatement of the lease from 25 March 2020, Sneakerboy could avail itself of the rent relief provisions in the COVID-19 Regime on a retrospective basis;
The COVID-19 Regime was to be treated as a neutral factor and did not prevent the Court from granting the relief sought by Sneakerboy even though it was unfair to the landlord who would now have to negotiate a substantial reduction in rent; and
Sneakerboy must reinstate the bank guarantee with the timing of reinstatement to be determined later, either by agreement between the parties or by the Court.

Second decision: clarifying the COVID-19 Regime

The Court delivered a second decision dealing with various remaining issues between the parties and clarified several important questions, including:

How long is the ‘reasonable recovery period’?

The COVID-19 Regime provides that rent relief should continue for the entire COVID-19 pandemic period (which will continue as long as the JobKeeper program is operational) and a subsequent reasonable recovery period. The Court found that a reasonable recovery period in Sneakerboy’s case was at least six months.

However, it is important to remember that the Court made this finding of fact based on the particular evidence presented to the Court, and a different decision might be reached for another tenant with different financial and other circumstances.

How should parties determine the appropriate rent reduction if a tenant trades from more than one location or also trades online?

Leasing Principle 3 of the National Cabinet Mandatory Code of Conduct requires that a landlord offer a tenant rent reductions which are proportionate to the reduction in the ‘tenant’s trade’.

The Court found that, generally speaking, ‘tenant’s trade’ refers to the whole of a particular tenant’s turnover, as well as costs and profit, from all locations at which the tenant conducts its businesses. Again, however, the rule is not absolute – the Court commented that arrangements between landlords and tenants must account for the impact of COVID-19 on the tenant ‘with specific regard to its revenue, expenses and profitability… all premises are different, as are their commercial arrangements.’

What if one party refuses to take part in the renegotiations or the mandated renegotiations between the tenant and the landlord fail?

A dissatisfied party has the right to refer the renegotiations to mediation by a Registrar of Retail Tenancy Disputes in the Office of the NSW Small Business Commissioner, in accordance with the dispute resolution process in Part 8 of the Retail Leases Act 1994 (NSW).

However, given the Registrar does not have the power to make a binding decision in relation to the dispute, what happens if mediation fails?

The Court commented that it is not clear whether the NSW Civil and Administrative Tribunal or the Courts have jurisdiction to determine any disputes arising in relation to renegotiations under the COVID-19 Regime which are not resolved by mediation. This may cause real headaches where one party is being unreasonable or if the issues in dispute are particularly complex.

What if the renegotiations are not completed by the time the NSW regulations are repealed? Do the parties have any enforceable rights?

Justice Robb commented that it was not clear whether the COVID-19 Regime will confer enforceable rights on parties to renegotiations which are not completed before the NSW COVID-19 Regulation is repealed (which is now scheduled to occur on 31 December 2020).

The warning here is that parties should try to resolve their renegotiations before the end of the COVID-19 pandemic period so that they have certainty about the rights and obligations exist under the lease when the regulation is repealed. For example, a tenant who is in default under their lease and who has not successfully renegotiated their lease by the end of COVID-19 pandemic period may find themselves struggling to enforce any right to rent relief which was intended to be conveyed to them under the COVID-19 Regime.

Extension of COVID-19 Regulation to 31 December 2020

The extension of the NSW COVID-19 Regulation until the end of this year means that commercial tenants and landlords now have four months to renegotiate the terms of their leases.

In addition, the NSW Government has announced today that:

Tenants who wish to request further rent relief must re-establish their eligibility to receive that relief (presumably, by providing evidence of a reduction in the tenant’s trade);
Landlords who provide rent relief to commercial (and residential) tenants in financial distress from October to December 2020 will be eligible to receive up to 25% land tax concession; and
The NSW Government has committed $10 million to enable the NSW Small Business Commissioner to provide more mediators and advisory services to assist parties to reach agreement on the renegotiated terms of their commercial leases.

Any party who finds themselves in a stalled negotiation may wish to refer their dispute to the NSW Registrar for Retail Tenancy Disputes in the Office of the NSW Small Business Commissioner (or the corresponding authority in other states) for mediation as soon as possible, in order to try to resolve the renegotiations prior to the repeal of the NSW COVID-19 Regulation. Hall & Wilcox is available to assist landlords and tenants with any commercial leasing disputes under the COVID-19 Regime.