COVID-19 Retail and Commercial Leases Regulation Extended – Support Continues for Retail and Commercial Tenants

In our previous paper we discussed the NSW Government’s announcement that the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (COVID-19 Regulation No 1), which was set to end on 25 October 2020, would now be extended to 31 December 2020.

To give effect to that extension, the NSW Government has made the Retail and Other Commercial Leases (COVID-19) Regulation (No 2) 2020 (NSW) (COVID-19 Regulation No 2), effective as of 24 October 2020. The COVID-19 Regulation No 2 has replaced the COVID-19 Regulation No 1.

The COVID-19 Regulation No 2 continues to give effect to aspects of the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (Code) by, inter alia:

  • prohibiting lessors from terminating leases for non-payment of rent;
  • prohibiting lessors from drawing on lessees’ security for the non-payment of rent; and
  • prohibiting an increase in rent during the prescribed period.

Changes to the COVID-19 regime

“prescribed actions”

The scope of the prescribed actions prohibited by the COVID-19 Regulation No 1 remain unchanged under the COVID-19 Regulation No 2.

“prescribed period”

The COVID-19 Regulation No 2 has increased the length of the prescribed period from 6 months to 8 months and 8 days. The prescribed period is now the period commencing on 24 April 2020 and ending on 31 December 2020.

“impacted lessee”

Under the COVID-19 Regulation No 2, the definition of ‘impacted lessee’ (Impacted Lessee) has been changed to reflect the introduction of JobKeeper 2.0. Whilst the requirement for turnover, in the 2018-2019 financial year, to be less than $50 million has been preserved, lessees must also qualify for the JobKeeper 2.0 scheme in order to satisfy the definition of Impacted Lessee for the purposes of remaining eligible for rent relief under the COVID-19 Regulation No 2.

A lessee is now required to satisfy an actual decline in turnover test in respect of the quarter ending 30 September 2020. That is, a lessee will qualify where their actual GST turnover for the quarter ending 30 September 2020 has declined by the specified shortfall percentage in comparison to their actual GST turnover for the corresponding quarter in 2019. Generally, the shortfall percentage will be 30%. However, some ACNC-registered charities are subject to different percentages, being 15%.

Prohibitions

The COVID-19 Regulation No 1 prohibited the lessor taking prescribed action against an Impacted Lessee in respect of a breach of the impacted lease during the prescribed period consisting of:

  • a failure to rent;
  • a failure to pay outgoings; or
  • the business operating under the lease not being open for business during the hours specified in the lease.

The COVID-19 Regulation No 2 continues to provide this prohibition but has modified it to clarify the prohibition only operates during the prescribed period. The prohibition is lifted once the prescribed period ends. As a result, a lessor may now be able to take prescribed action against a lessee after the prescribed period.

Renegotiations

The COVID-19 Regulation No 2 has introduced the ability for a party to an impacted lease to make a secondary or subsequent request for the other party to renegotiate the terms of, or rent payable under, the lease. However, a secondary or subsequent request may be made by the lessee only if:

  • it is made during the prescribed period; and
  • it does not relate to the rent in respect of a period for which a reduction, deferral or waiver of rent has been previously agreed under the rent relief regime.

Notwithstanding the above, the parties can agree to renegotiate outside of the prescribed period and in respect of a period for which a reduction, deferral or waiver of rent has been previously agreed.

Where a request for renegotiation is made, the COVID-19 Regulation No 2 requires the other party to commence renegotiation within 14 days of receiving the request or within another period as agreed by the parties.

The COVID-19 Regulation No 2 has also clarified that, where a renegotiation is commenced but not concluded prior to the expiry of the prescribed period, the renegotiation is not abandoned and may be continued and settled after that expiry.

Savings

For lessees that were covered by the COVID-19 Regulation No 1, but are no longer covered by the COVID-19 Regulation No 2, there are applicable savings provisions to ensure those lessees are not deprived of their earlier protections.

The savings provisions state that a lessee who was an Impacted Lessee under the COVID-19 Regulation No 1 will continue to be protected under the COVID-19 Regulation No 2 in relation to a breach of the Impacted Lease that occurred during the period 24 April 2020 to 23 October 2020.

The savings provisions also clarify that a lessee who was an Impacted Lessee under the COVID-19 Regulation No 1 at any time during the period 24 April 2020 to 23 October 2020 will be taken to have been an Impacted Lessee for the whole of that period.

Lastly, any renegotiation that was commenced but was not concluded before the COVID-19 Regulation No 1 was repealed may be continued and concluded under the COVID-19 Regulation No 2.

Clarification and continuing uncertainty

As outlined in our previous paper, the NSW Supreme Court, in the case of Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 (Sneakerboy No 2), provided some useful commentary in respect of the interpretation and application of the COVID-19 Regulation No 1. Much of this commentary was subsequently applied or clarified by the changes introduced in the COVID-19 Regulation No 2. Specifically, the introduction of the ability for a party to an impacted lease to make a second or subsequent renegotiation request has confirmed the Court’s interpretation of clause 7 of the COVID-19 Regulation No 1, where it was stated that multiple renegotiation requests are permitted under the clause, provided that the circumstances warranted it and that the requests were made in ‘good faith’.

The Court also provided some commentary in respect of clauses 5 and 6 of the COVID-19 Regulation No 1 and determined that the intention of those clauses was to prohibit the lessor from taking enforcement action against the lessee, for breaches occurring during the prescribed period, at any time. However, the COVID-19 Regulation No 2 clarified that the prohibition only operates during the prescribed period, with lessors able to take prescribed action against the lessee after the prescribed period.

However, there remains continuing uncertainty surrounding dispute resolutions mechanisms following a failure of renegotiations. The Court in Sneakerboy No 2 noted that, failing mediation, it was not entirely clear how a Court or Tribunal could resolve a failed renegotiation. The Court noted that the COVID-19 Regulation No 1 did not give a Court or Tribunal any specific power to resolve any dispute arising out of a failed renegotiation and the Court’s historical jurisdiction does not permit it to remake contracts on the basis of commercial considerations. The COVID-19 Regulation No 2 does not resolve this uncertainty or provide any further guidance on this matter.

What’s next?

The NSW Government has used the COVID-19 Regulation No 2 to change and clarify certain parts of the COVID-19 regime. Despite all of these changes, the cut-off date for determining whether or not a lease is covered by the regime remains the same. It would appear that the NSW Government does not intend to protect new leases entered into on or after 24 April 2020, except for those entered into by way of a renewal. For new leases, the onus appears to be on the lessee to ensure it negotiates adequate protections within its lease to cover future shocks caused by the COVID-19 pandemic.

We encourage all lessors and lessees to re-examine their position in light of the COVID-19 Regulation No 2 and to contact us for further information.


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