On 7 April 2020, the National Cabinet adopted the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles during COVID-19 (Code). The Code contemplated that it would be given effect through relevant State and Territory legislation or regulation.
New South Wales has now passed the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (Regulation) to implement the Code's intent. A separate regulation applies for retail leases and for commercial/industrial leases, but there are no material differences between the 2 regulations.
Below is a summary of the Regulation.
What does it do?
The object of the Regulation is to give effect to the Code and particularly to:
- prohibit and regulate the usual enforcement rights of landlords during the COVID-19 pandemic period; and
- require landlords and tenants to renegotiate the rent and other terms of retail, commercial and industrial leases in good faith having regard to the Code before any enforcement action can be commenced.
Yes - It is an adoption of the Code
Interestingly, although the Regulation adds specificity (beyond what was stated as general principles in the Code) to things such as the restriction on enforcement rights of landlords and the dispute resolution process, with respect to rent relief nothing of substance was added to put any gloss on the Code. In the renegotiation of rent payable under a lease that is captured by the Regulation, the parties must have regard to 'the economic impacts of the COVID-19 pandemic' and 'the leasing principles set out in the National Code of Conduct'.
When does it apply?
The Regulation takes effect on 24 April 2020 and is repealed automatically on 24 October 2020 (being 6 months after it commenced) (Prescribed Period).
The Regulation applies to the exercise or enforcement of rights under affected leases (described below) in relation to circumstances occurring during the Prescribed Period.
What leases does the Regulation affect?
A retail lease or a commercial/industrial lease entered into:
- before the commencement of the Regulation
- after the commencement of the Regulation where it results from the exercise of an option to renew an existing lease.
What tenants does the Regulation affect?
The Regulation applies to tenants (Impacted Tenants) under any of the above leases if:
- the tenant qualifies for the Job-Keeper scheme; and
- the turnover of the tenant was less than $50 million in the 2018-2019 financial year and:
- if the tenant is a franchisee, it is the turnover of the business conducted at the actual leased premises
- if the tenant is a corporate group, it is the turnover of the group.
What prohibitions and restrictions apply?
Where the tenant is an Impacted Tenant:
- A landlord must not take any Prescribed Action (described below) against an Impacted Tenant in relation to circumstances occurring during the Prescribed Period for:
- failure to pay rent
- failure to pay outgoings
- not being open during the trading hours in the lease
- A landlord must not increase the rent (other than turnover rent) during the Prescribed Period (and must not take action for any failure to pay a rent increase which would have otherwise applied).
- If an Impacted Tenant is specifically required to pay or reimburse the landlord for land tax, statutory charges or insurance (Taxes and Charges), then a landlord must pass on the appropriate proportion of any reduction the landlord receives in Taxes and Charges to the Impacted Tenant.
- Anything an Impacted Tenant is required to do or not do under Commonwealth or State COVID-19 pandemic laws does not constitute a breach of a lease and does not allow Prescribed Action to be taken by a landlord.
- None of the above prevents a landlord and an Impacted Tenant agreeing to Prescribed Action being taken.
What a landlord cannot do?
A landlord must not take action under a lease, seek orders or commence proceedings for any of the usual enforcement actions. These prohibitions (Prescribed Action) are:
- Termination type actions- termination of a lease, re-entry and recovering possession or eviction of an Impacted Tenant
- Claim on security - recovery under a bank guarantee or security bond, or claiming under any other guarantee
- Seizing goods - seizing or forfeiting of goods of an Impacted Tenant
- Interest - charging interest or other fees for unpaid rent
- Damages claim-a claim for damages against an Impacted Tenant
- Other (Catch all)-any other remedy otherwise available to a landlord at law
Obligation to renegotiate
In any case where a Prescribed Action might be able to be taken against an Impacted Tenant for non-payment of rent during the Prescribed Period, a landlord must first comply with the following:
- renegotiate the rent payable under the lease if requested by the Impacted Tenant or initiated by the landlord
- conduct the renegotiation in relation to the rent and other terms of the lease in good faith having regard to:
- the economic impacts of the COVID-19 pandemic; and
- leasing principles set out in the Code.
Dispute resolution under both retail and commercial/industrial leases
The dispute resolution process in part 8 of the Retail Leases Act 1994 (NSW) applies to commercial/industrial leases. Therefore, unless the amount in dispute is greater than $750,000, NSW Civil and Administrative Tribunal is the tribunal with jurisdiction.
Therefore, for both a retail lease and a commercial/industrial lease, a landlord must obtain certification from the Small Business Commissioner that mediation has been conducted and has failed before a landlord can:
- seek to recover possession of premises or land
- terminate the lease
- exercise or enforce any other right under the lease.
What about non COVID-19 pandemic related breaches?
A landlord is not prevented from taking a Prescribed Action against an Impacted Tenant on grounds not related to the economic impacts of the COVID-19 pandemic.
In a practical sense, this means that if the tenant was in arrears for a period before the Regulation took effect (ie pre-April 2020 arrears) or was in breach of some other obligation before the Regulation took effect, the landlord can pursue its rights in the usual way. Therefore, the landlord (if it chooses) can re-enter and terminate the lease if the tenant does not rectify a pre-COVID-19 pandemic breach.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.