Thinking | 1 May 2020

Mediation to resolve rent relief negotiations in NSW

By Kitty Vo and Albert Ponte

What happens when agreement cannot be reached between landlord and tenant? In this article, we provide practical insight into the mediation process contemplated under the mandatory Code of Conduct for commercial tenancies and the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW).

NSW COVID-19 Retail & Commercial Tenancy Regulation

The commencement of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (NSW Regulation) on 24 April 2020 sees the formal introduction into NSW legislation of the National Cabinet Mandatory Code of Conduct (Code). The Code, which was announced by the Federal Government on 7 April 2020, will already be familiar to many landlords and tenants. For more information about the Code, please see our article The Code of Conduct for commercial tenancies, which summarises the eligibility requirements and the leasing principles mandated by the Code.

The NSW Regulation will be in force for six months commencing on 24 April 2020, being the ‘prescribed period’. The landlord and the tenant (being an ‘impacted lessee’ as defined in the NSW Regulation) can be required to attempt to renegotiate the lease in good faith to accommodate the drop in the tenant’s trade as a result of COVID-19. There are wide-ranging restrictions on the lessor’s ability to enforce the terms of the lease and to exercise certain rights under the lease during that period – for example, terminating the lease for non-payment of rent.

What happens if the parties cannot reach agreement on the lease amendments?

Unsuccessful negotiations

The Code provides a framework for negotiating amendments to the lease during the COVID-19 crisis. The somewhat prescriptive nature of the leasing principles will assist many parties to renegotiate their leases relatively expeditiously. We recommend that any agreed variations to the lease are properly documented.

Of course not all negotiations will result in a mutually acceptable outcome for both parties. In particular, if either the lessee or the lessor (or both) were already in financial distress, or are suffering acutely from the economic effects of the pandemic, a negotiated settlement will be more difficult to achieve.

The Code envisages that any reductions in rent should be proportionate to the impacted lessee’s reduction in turnover. However, in some cases, it may take some time for the full extent of reductions in turnover to materialise – which may lead to a stalemate.

Due to various reasons, some negotiations will inevitably fail. What happens then?

Next step: mediation

The Code provides that where landlords and tenants cannot reach agreement on the renegotiated terms of the lease, the matter should be referred to applicable state or territory retail/commercial leasing dispute resolution processes for mediation.

In NSW, this is reflected in regulation 8 of the NSW Regulation, which brings any ‘impacted commercial lease dispute’ within the scope of Part 8 of the Retail Leases Act 1994 (NSW) (RLA).

Part 8 of the RLA provides a dispute resolution mechanism for retail tenancy disputes, which requires all such disputes to be subjected to mediation before they can proceed to a court or the NSW Civil and Administrative Tribunal (NCAT) for determination. Mediations under the RLA are facilitated by the NSW Small Business Commissioner.

If your lease renegotiation under the NSW Regulation (and the Code) is unsuccessful, you can contact the NSW Small Business Commissioner via their website to enquire about setting up a mediation.

What to expect at mediation

Mediation is a tried and tested dispute resolution process. It is a structured negotiation facilitated by an independent, third party mediator, with a view to achieving settlement of a dispute. The role of the mediator is to help the parties clarify the real issues and explore the various options available to achieve a settlement – the mediator does not make a determination of the issues in dispute.

While there is no prescribed format, mediations often begin with a joint session in which the mediator will encourage the parties to have an open discussion to identify and discuss the obstacles to settlement. The joint session is usually followed by separate sessions between each party and the mediator, in private, to further explore the issues with a view to arriving at a negotiated resolution.

To encourage open dialogue, information exchanged during mediation is treated as confidential and subject to ‘without prejudice’ privilege (meaning that it is not admissible in evidence in any subsequent proceedings relating to the dispute).

Prior to the onset of COVID-19 the vast majority of mediations would take place in a single physical location, usually with a separate room assigned to each party (for the private sessions). While, at the time of writing, some states are beginning to ease their social-distancing restrictions, it may still be the case that your mediation takes place online via video conference.

How to prepare

Preparation will be key to the success of the mediation, particularly from the point of view of the lessee.

Know what the key commercial terms of the lease are

Ensure you have a copy of the lease and any ancillary documents such as incentive deeds and licences.

To save time during the mediation, prepare a one-page summary of the key commercial terms of the lease and the financial obligations of the lessee, for example the terms of the lease, the expiry date, rent, turnover rent, promotion levies, outgoings and other amounts payable under the lease.

The lessor should also be prepared to provide details of all statutory charges paid by the lessor (such as land tax and council rates) and insurance, together with information regarding the savings which the lessor anticipates it will receive from the various authorities.

Gather financial information

The main aim of the impacted lessee should be to demonstrate that their turnover has been impacted negatively as a result of the pandemic, since that is the benchmark for any rent waiver or deferral under the Code.

However, this is also relevant from the lessor’s point of view, since their financial ability to offer waivers of rent (over and above the prescribed minimum) is a factor to be considered under the ‘leasing principles’ in the Code.

The parties should be prepared to provide current, as well as pre-COVID, financial information in order to demonstrate the relative fall in turnover.

Consider other supporting information

Each business is different and each business will be impacted by COVID-19 differently.

Whether you are the lessee or the lessor, consider whether there is any other information that may help the other party and the mediator understand the issues from your perspective.

Be clear, be succinct

Time will be limited during the mediation, so we recommend that the lessee focuses its efforts on the succinct presentation of the financial information (and any other supporting information). The information should clearly explain how, and to what extent, COVID-19 has impacted the financial position of the business. If necessary, seek the assistance of your accountant to obtain and prepare the financial information.

Help the mediator help you

An important part of the mediator’s role is to help each party see the dispute from the point of view of their opponent. Make this easy for the mediator by giving them relevant, easy to understand and well-prepared financial and other information. This will also help the lessor understand the lessee’s financial position more clearly.

Prepare a draft term sheet before the mediation

It is also useful to prepare, before the mediation, a draft document to record any agreement you might reach at the end of the mediation. We understand this might feel somewhat futile when you haven’t yet completed the negotiation. However, there are at least two good reasons for doing so.

Firstly, this process will help you think about your particular circumstances and whether there is something (perhaps not immediately obvious) that you would like to see included in the final agreement. It may not be particularly controversial or difficult to negotiate, but if you only think about it after the mediation, it will be too late.

Secondly, it will save time and increase the chances of getting a binding written agreement concluded on the day of the mediation. Avoid the unfortunate scenario where an agreement in principle is achieved at mediation, but falls apart after the parties are given a chance to ‘sleep on it’.

As much as we hope that all parties are able to negotiate mutually acceptable rent relief packages and lease variations, given the complex issues arising from COVID-19, it is inevitable that some parties will be required to participate in mediation as part of the mandatory dispute resolution process required under the NSW Regulation and the Code.

If you would like further assistance to navigate through the mediation process or any other aspects of your negotiations, please do not hesitate to contact us.

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