NSW enacts COVID-19 leasing regulations for commercial tenancies

By Maurice Doria 

The National Cabinet’s mandatory Code of Conduct for commercial tenancies now has legal force in NSW. It came into effect by the enactment of the Retail and Other Commercial Leases (COVID-19) Regulation 2020.

The Regulation has been anticipated since the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 was passed. Essentially, the Regulation codifies in NSW tenancy laws the Code’s requirements that seek to share in a proportionate, measured manner the financial risk and cash flow impact during the period of the COVID-19 pandemic.

Tenancies to which the Regulation applies

Criteria relating to both the subject tenancy and the lessee under that tenancy must be satisfied for the Regulation to apply.

The subject tenancy must be a retail shop lease under the Retail Leases Act 1994 (NSW) or a commercial lease to which the Conveyancing Act 1919 (NSW) applies, excluding:

• a new retail shop lease or commercial lease entered into after the commencement of the Regulation (that is, 24 April 2020); or
• a lease under the Agricultural Tenancies Act 1990 (NSW).

The lessee must be an ‘impacted lessee’, being a lessee under a lease who qualifies for the JobKeeper scheme and the lessee’s turnover in the 2018–2019 financial year was less than $50 million (including internet sales of goods or services).  In determining the lessee’s turnover, if the lessee:

• is a franchisee, the turnover is that of the business conducted at the relevant leased premises;
• is a corporation that is a member of a group, the turnover is that of the group;
• in any other case, the turnover is that of the business conducted by the lessee.

What does the Regulation do?

The Regulation imposes on landlords and tenants the requirements and benefits set out in the Code.  There are three (3) key measures the Regulation imposes that directly affect a lessor enforcing legal rights under a lease or at law generally in relation to a tenancy.

Prohibited actions

During the prescribed period (ie six months commencing from 24 April 2020), lessors are prohibited from taking a prescribed action against a lessee who breaches the lease by failing to pay rent or outgoings, or because they are operating their business during hours that are contrary to the hours specified in the lease.

Prescribed actions include:

• Terminating the lease;
• Evicting the lessee or retaking possession of the premises;
• Claiming damages or penalty interest against the lessee;
• Recovery of whole or part of a security bond under the lease; or
• Any other remedy available to the lessor against the lessee for the breach.

Consistent with the leasing principles in the Code, the Regulation prohibits the lessor from increasing the rent during the prescribed period.

Additionally, if the lessee is obliged to pay land tax, other statutory charges (such as council rates) or insurance under the lease, the Regulation requires lessors to pass on to the lessee any reductions which the lessor receives.

Requirement to renegotiate before prescribed action

Lessors can only take a prescribed action if:

• the lessor or the lessee has made a request to renegotiate the rent payable under, and other terms of, the lease;
• the requested negotiations have been conducted in good faith; and
• the negotiations must have regard to the economic impacts of the COVID-19 pandemic, and the leasing principles set out in the Code.

The Regulation mandates a renegotiation but does not indicate to what extent a concluded agreement must be reached between the lessor and lessee for these requirements to be satisfied.  This lack of clarity is unfortunate.

Dispute resolution

For retail shop leases the Regulation requires the parties to resolve their disputes in accordance with dispute resolution requirements under the Retail Leases Act 1994 (NSW). This dispute resolution process requires parties to attempt mediation with the Office of the NSW Small Business Commissioner before applying to the New South Wales Civil and Administrative Tribunal or the Court for an order.

For other leases, under the Regulation, no legal proceedings to enforce rights can be commenced unless the Small Business Commissioner has certified that mediation has been unsuccessful.

Where legal proceedings are taken, the relevant Courts or tribunals must have regard to the leasing principles in the Code when considering whether to make an order relating to a lessors’ recovery of possession, termination of the commercial lease, or the exercise or enforcement of any other rights.

A prescribed action can be taken if the parties concur to that action being taken. For example, a claim against a tenancy security as part of the negotiated suite of measures the parties agree to implement.

Lessors may take a prescribed action on grounds not related to the economic impacts of the COVID-19 pandemic. For example, a lessor taking action because a tenant has failed to satisfy a lease obligation requiring public risk insurance be taken out and kept current.

What should I do?

Our article 'The Code of Conduct for commercial tenancies' contains suggestions and recommendations on what lessors and lessees might do to address the Code’s requirements.  Those suggestions and recommendation remain relevant and do not change as a result of the Regulation coming into force.

If parties are in the process of negotiating a new lease, given that the Regulations do not apply to leases entered into after 24 April 2020, tenants should also consider whether:

• a rent relief package should be included as part of the new lease negotiations;
• the commencement date of the lease should be delayed; and
• FIRB approval is required for the leasing transaction (please refer to our article regarding mandatory FIRB clearance for foreign persons entering commercial leases during the COVID-19 pandemic period).

As previously noted, the Regulation permits lessors to take action against a lessee on grounds not related to the economic impacts of the COVID-19 pandemic. As such, lessees should ensure compliance with the remaining provisions of its lease, for example, repair and maintenance obligations and make good obligations following expiry of the lease.

Please do not hesitate to reach out to us to discuss ways in which we can help in your conversations.