Leasing

On Saturday, 25 April 2020, new regulations were published in New South Wales to give immediate effect to the NSW Government’s COVID-19 rental relief measures.
In this way New South Wales has endorsed the Federal Government’s National Cabinet’s Code of Conduct released on 7 April 2020.

Summary
The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (the Regulation) is made under the Retail Leases Act 1994 (NSW) and the Conveyancing Act 1919 (NSW). The amendments to the Conveyancing Act 1919 (NSW) amend the Amendment of Conveyancing (General) Regulation 2018 (NSW) in order to capture relevant non-retail commercial leases.The Regulation is in effect for 6 months from 24 April 2020 and repealed on 25 October 2020.

What has changed?
The Code has now become law. The NSW Government released the Regulation to give effect to the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID‑19 (the Code) adopted by the National Cabinet on 7 April 2020.

The Code imposed a set of good faith principles for application to commercial tenancies (including retail, office and industrial) between landlords and tenants. Under the Code, eligible tenants will be entitled to request rent reductions in the form of waivers and deferrals from their landlords. The Code applies to all small‑medium enterprise tenancies that are suffering “financial stress or hardship” (as that term is defined in the Code) as a result of the COVID‑19 pandemic.

The Regulation prohibits and regulates the exercise of certain rights of landlords relating to the enforcement of certain commercial leases during the pandemic period; and requires that landlords and tenants who are subject to the Regulation negotiate the rent and other terms of those commercial leases in good faith having regard to the leasing principles set out in the Code, before any legal enforcement action of the terms of those commercial leases may be commenced.

Who is affected?
The Regulation applies to ‘commercial leases’, being:
a retail shop lease (as defined in Schedule 1 of the Retail Leases Act 1994 (NSW) (RLA); and
any agreement relating to the leasing of premises or land for commercial purposes,
but does not include:

a lease entered into after 24 April 2020 (when the Regulation came into effect), although it will capture leases entered into due to an exercise of option or renewal of an existing lease after this date; ora lease under the Agricultural Tenancies Act 1990 (NSW) which governs the rights of agricultural landowners, tenants and sharefarmers.

It is important to note that the definition of ‘retail shop lease’ under the RLA includes any agreement where a person is granted a right of occupation of premises to use premises as a retail shop.

A lease may be deemed to be a retail lease under the RLA irrespective of whether the tenant has a right of exclusive occupation, whether the agreement is express or implied or whether the agreement is oral or in writing. This means that licences and other agreements which on their face may not look like a lease are captured by the RLA and may fall within the effect of the Regulation.

Who is covered by the Regulation?
The Regulation provides relief to ‘impacted lessees’, being tenants who:

  • qualify for the Commonwealth Government’s JobKeeper scheme; and
  • have a turnover in the 2018–2019 financial year of less than $50 million, noting that turnover is defined as follows:
  • if the tenant is a franchisee – the turnover of the business conducted at the premises or land concerned,
  • if the tenant is a corporation that is a member of a group* – the turnover of the group, or
  • in any other case – the turnover of the business conducted by the tenant,
    * the Regulation provides that corporations constitute a ‘group’ if they are related bodies corporate within the meaning of the Corporations Act 2001 (Cth). The Corporations Act states that a where a body corporate will be related to a second body corporate if it is:

1) the holding company of another body corporate;

2) the subsidiary of another body corporate; and / or

3) the subsidiary of a holding company of another body corporate.

Sublandlords and subtenants
The Regulation does not prohibit sub-tenants from relying on the protections afforded by the Code. Accordingly, there may be circumstances where a sublandlord does not qualify for relief under its head lease, but is required to give concessions to its eligible subtenant.

New prohibitions and restrictions under the Regulation

Prohibition on legal action

If in New South Wales an ‘impacted lessee’ is in breach of its commercial lease during the pandemic period due to:

a failure to pay rent, or
a failure to pay outgoings, or
the business operating under the lease is not open for business during the hours specified in the lease,
then the landlord will be prohibited seeking orders or issuing proceedings in a court or tribunal for certain actions, including but not limited to :

• eviction of the tenant from the premises or the land;
• exercising a right of re-entry to the premises;
• detaining goods;
• forfeiture of the lease;
• seeking damages;
• drawing down on the tenant’s security bond;
• possession of the premises; or
• termination of the lease.
• Given that a significant percentage of turnover comes from online sales, the Regulation recognises and clarifies that turnover includes turnover from internet sales or services.

Prohibition on rent increases

Where a tenant is an ‘impacted lessee’ as discussed above, the landlord is prohibited from increasing the rent payable under the commercial lease during the pandemic period. However, the Regulation does not prohibit landlords from recovering an increased rent amount where that rent is determined by reference to turnover.

After the pandemic period, landlords are prohibited from taking any legal action against the tenant on the grounds of a breach of the lease due to a failure to pay an amount equivalent to the rent increase that would have ordinarily been payable, if not for the application of the Regulation.

What obligations exist to re‑negotiate rent and other terms?
Landlords are prohibited from taking or continuing any legal action against a tenant on grounds of a breach of the lease for failure to pay rent during the pandemic period, unless the landlord has complied with certain conditions set out under the Regulation, including:

engaging in good faith negotiations with the tenant in relation to renegotiations of the rent and other terms of the lease, if a party to the lease requests such renegotiation; and
have regard to the economic impacts of the COVID‑19 pandemic and the leasing principles set out in the Code (leasing principles 3‑5, 7‑10 and 12).

For example, before a landlord may commence any form of legal action or order, principle No. 3 of the Code requires the landlord to first offer rent reductions in the form of waivers or deferrals of rent, proportionate to a tenant’s reduction in turnover.

Landlords may wish to request that tenants they are negotiating with pay any rent arrears arising before the date the Regulations came into effect, as a condition to entering into any variations to reduce the rent or vary other terms.

Disputes must be submitted to mediation before proceedings can be commenced.
Landlords may not attempt to recover possession of premises or land under the lease, terminate the lease or, exercise or enforce any other right of the landlord under the lease, until the dispute has been mediated, and the failure of that mediation has been recognised and recorded by the Small Business Commissioner.

Action for non-COVID-19 pandemic related reasons

Although the Regulation impedes the ability a landlord may have to enforce its rights under an eligible lease, the Regulation itself specifies that there is nothing to prevent a landlord from taking legal action or seeking an order on grounds unrelated to the economic impacts of the COVID-19 pandemic.

This could mean for example, a landlord may terminate a commercial lease if the tenant has breached the lease by damaging the premises and not rectifying the damage, or may take action if the tenant fails to vacate the premises following the expiry of a fixed term commercial lease.

While the Regulation appears to enforce a broad prohibition on a landlord’s ability to take action for breach, this is not the case and tenants need to remain aware of their obligations to otherwise comply with the terms of their leases.

National Cabinet Mandatory Code Of Conduct

The Code of Conduct, also called the SME Commercial Leasing Principles During COVID-19 (“the Code”) applies to commercial tenancies (including retail, office and industrial) where the tenant is an eligible business.

Application

‘Eligible business’ means that the business has:

  1. Qualified for the Commonwealth Government’s JobKeeper programme and,
  2. Have turnover of less than $50M.

‘Eligible business’  are also referred to in the Code as “SME tenants”. The Code applies to existing leasing arrangements.

The Code  goes on to say that it is to apply ‘in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses.’

The Code therefore applies to all commercial tenancies.

Is the Code law?

The Code will be given effect through relevant state and territory legislation or regulation as appropriate. State and Territory laws are coming.  In the meantime, we have the Code.

Overarching Principles

It is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis.

The following overarching principles of this Code will apply in guiding such arrangements:

Landlords and tenants will be required to discuss:

  1. relevant issues,
  2. negotiate appropriate temporary leasing arrangements

Both landlords and tenants should take care to have retained evidence of having done this. We suggest that all correspondence be written, at the very lease in email and preferably on letterhead and signed by the Lessor. This will assist if there is a dispute at some future time about what was agreed.

The Parties will assist each other in their respective dealings with other stakeholders including governments, utility companies, and banks/other financial institutions

This requirement is included in the Deed precedent in paragraph 19.

The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under this Code. We understand this to mean that a landlord may not seek a guarantor or security (in the form of a caveatable interest or PPSR registration), if these are not already included in the Lease.

All leases must be dealt with on a case-by-case basis,

After sending the initial letter to the tenant, we suggest the solicitor intervene to negotiate and create a  tailored solution for each tenant.

 

As the objective of this Code is to mitigate the impact of the COVID-19 pandemic on the tenant, due regard should be given to whether the tenant is in administration or receivership, and the application of the Code modified accordingly. We understand this to mean that once a business is in the hands of a liquidator, then the laws governing liquidation take over. The duties implied by the Code to a tenant are not owed to a liquidator. When a liquidator steps in to run the business in administration then the tenant is absolved of responsibility. It is no longer possible to negotiate with the tenant as the liquidator has stepped into their shoes.

 

What rules apply to deferrals and waivers which one should I implement? (Leasing Principles)

 

Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

 

Rental waivers must constitute no less than 50% of the total reduction in rent and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers.

Tenants may waive the requirement for a 50% minimum waiver by agreement.

 

What rules apply to deferrals and waivers and when should I implement?

 

Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.

 

Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.

It is noteworthy that these have yet to occur.

 

A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution with the tenant in a proportionate manner.

 

Must a tenant still pay outgoings?

Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, under lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.

 

Outgoings must be paid unless a tenant is unable to trade.

 

When should deferred rent be repaid?

If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of:

 the COVID-19 pandemic ending (as defined by the Australian Government) or

 the existing lease expiring, and

taking into account a reasonable subsequent recovery period.

 

Can a landlord charge interest on deferred rent?

No fees, interest or other charges should be applied with respect to rent waived or deferred.

 

Can a landlord claim on a bond or bank guarantee for unpaid rent?

Under normal circumstances a landlord would seek to claim on the bond or bank guarantee for unpaid rent. This is not permitted under the Code.

Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.

 

The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period

This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after the COVID-19 pandemic concludes.

 

Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant. Note that this requires the landlord’s agreement, depending on the other provisions in an agreement reached with a tenant.

 

Landlords may not apply any prohibition on levy any penalties if tenants reduce opening hours or cease to trade.

 

What if I cannot reach an agreement with my tenant? (Binding Mediation)

 

Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable. Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.

 

 

DEFINITIONS

 

The following definitions are provided in the Code.

 

Financial Stress or Hardship: an individual, business or company’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) that causes the tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments. SME tenants which are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under this Code.

 

Sufficient and accurate information: this includes information generated from an accounting system, and information provided to and/or received from a financial institution, that impacts the timeliness of the Parties making decisions with regard to the financial stress caused as a direct result of the COVID-19 event.

 

What is the difference between a waiver and a deferral?

The definition in the code is vague:

 

Waiver and deferral: any reference to waiver and deferral may also be interpreted to include other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), or any other such commercial outcome of agreements reached between the parties. Any amount of reduction provided by a waiver may not be recouped by the Landlord over the term of the lease.

 

From the context of these terms we have created the following definition: A waiver is a rent free period. Deferral requires repayment of all or part of the rent at some future time.

 

Proportionate: the amount of rent relief proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period, consistent with assessments undertaken for eligibility for the Commonwealth’s JobKeeper programme.

 

Leases in Holding Over

Leases that have run their term and are in holding over effectively have no security for the Lessor. The Lessor may not claim on the bond or bank guarantee (under the Code)  and there is insufficient time left in the term of the lease for any deferrals in rent to be repaid. The Lessor may in this instance legitimately terminate the Lease by giving notice.

 

Note that the Lessor must not cite non-payment of rent as being the reason for termination. The Lessor is simply exercising their right to end the tenancy by giving notice and does not (and should not) give a reason.

 

When does the Code commence and for how long does it last? (Commencement & Expiry)

 

This Code comes into effect in all states and territories from a date following 3

April 2020 (being the date that National Cabinet agreed to a set of principles to guide the Code to govern commercial tenancies as affected by the COVID- 19 pandemic) to be defined by each jurisdiction, for the period during which the Commonwealth JobKeeper program remains operational. In NSW this date is 7 April 2020.

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