CAN THEY SURVIVE ANOTHER HUGE HIT?
On the back of last week's four-week lockdown extension for large parts of New South Wales (NSW) and the ongoing rolling lockdown announcements across various other states, its timely to take a look at the current retail and commercial leasing support arrangements being offered and how they differ to those that were on offer in March/April 2020.
The majority of this analysis is focused on what's available in NSW but I do note that there are also various differing levels of support offered across the states/territories, see table below further information in this regard.
|NSW||Click here||SA||Click here|
|ACT||Click here||Qld||Click here|
|Vic||Click here||NT||Click here|
|WA||Click here||Tas||Click here|
Struggling hospitality business in Sydney's eastern suburbs
At the beginning of Greater Sydney's most recent lockdown, I was contacted by a historically successful hospitality business in Sydney's eastern suburbs to discuss the options its directors may have in relation to the business.
Post-lockdown the business was unable to pivot to a takeaway service as the whole business model doesn't lend itself to that kind of offering. Its survival through previous lockdowns was underpinned by its suppliers' support, coupled with the huge amount of state and federal government assistance available at that time.
Along with JobKeeper and the federal government cash-flow boosts, the other defining reason behind the hospitality business's ability to survive was the rental deferral and abatements negotiated with its current landlord. While the support was welcomed, the interim trading period between the last lockdown and the current lockdown hasn't been long enough to repay the previous debt overhang and their accumulated rental arrears.
The directors' attempts to sell the business have been thwarted by what appear to be the landlord's unrealistic expectations for the new potential tenant (and owner). This has left the directors at a crossroads.
What is currently available in NSW?
In NSW, amendments to the Retail Leases Act 1994 (NSW) were made via the Retail and Other Commercial Leases (Covid-19) Regulation 2021. Along with an amendment to Schedule 5 of the Conveyancing (General) Regulation 2018.
These changes offer protection to leasees in so far as if a 'prescribed breach' under the Regulations occur, during the prescribed period (13 July 2021 through 20 August 2021-presumably this may now be extended). This means lessors are precluded from evicting, re-entering, forfeiture, damages, possession, termination or any other remedies otherwise available to a lessor against a lessee without first attempting mediation.
'Prescribed Breaches' are limited to a failure to pay rent, to pay outgoings, or a failure to trade during the hours specified in the lease.
If the mediation fails to resolve the dispute, the lessor may be allowed to take further action. The Small Business Commissioner1 must certify whether the mediation occurred, and why it failed to resolve the dispute. The relief is limited to leasees with a maximum annual turnover of $50m and is in place for six months from the date of the regulation amendments. The NSW Treasury also announced plans to incentivise lessors to provide relief to lessees in return for land tax relief but this has yet to be codified in any legislative instrument.
What was previously available in NSW?
Beginning in 2020 and through to January 2021, we saw significantly more 'lessee-friendly' regulations introduced in response to the COVID-19 pandemic. January 2021 marked the commencement of the Retail and Other Commercial Leases (COVID-19) Regulation (No 3) 2020 and Schedule 5 of the Conveyancing (General) Regulation 2018 was also amended at this time to ensure consistency across the legislative framework (we'll refer to these as the "January Regulations").
The January Regulations (an extension of the 2020 regulations) offered protections to impacted lessees not echoed in the most recent Regulations. The January Regulations precluded a lessor from taking action against a lessee until both mediation and rent renegotiations were attempted. Further, rent increases were prohibited during the prescribed period, and any land tax savings provided to lessors were required under the regulation to be passed on to lessees.
Even more significantly, under the January Regulations (and the regulations they replaced), rent relief for eligible lessees was required to be offered proportionate to their declines in turnover. So if lessees faced a decline in turnover of 30%, then they would be entitled to 30% relief.
Beyond the requirement to mediate, none of these protections have carried through to the most recent round of Regulations.
Where does that leave the struggling hospitality business?
In effect, the directors of the hospitality business discussed above find themselves between a rock and a hard place. While they are protected from the remedies ordinarily available to landlords for breaches within the noted period, the rent and outgoings still continue to accrue and their landlord debt effectively gets bigger without the ability to trade during lockdown.
Where previously landlords were required to provide deferments/waivers/abatements in some cases, currently there is no way of requiring that the landlord come to the table to assist the current lease in enabling a business sale (and therefore a transfer/new lease)-it effectively leaves the business at the mercy of its current landlord.
Special thanks to the team at Hitch Advisory for their help with this article.
i Each state/territory has its own Small Business Commissioner.
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.