Australia: Retail and commercial leasing amendments in NSW in light of ongoing COVID-19 crisis

On 13 August 2021, the NSW Government passed the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 (the Regulation) in response to the second wave of the COVID-19 lockdown in New South Wales. In this article, we explore what the amended regulations are and the impact to retail / commercial tenants and landlords.

What is the Regulation?

The objective of the Regulation is to restrict landlords exercising certain rights against tenants, where the tenants is impacted (Impacted Lessee) for a prescribed period. The Regulation also extends the prescribed period under the Retail and Other Commercial Leases (COVID-19) Regulation 2021 and the Conveyancing (General) Regulation 2018 which started on 13 July 2021 until 13 January 2022 (previously ending on 20 August 2021).

The Regulation only applies to retail and commercial leases. For the tenant to qualify and be exempt from breaching its obligations under the lease, the following qualification criteria must be met:

Amendments for rent relief and renegotiation

In addition, the Regulation emphasises the principles of the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (the Code), which came into effect from 4 April 2020.

The objective of the Code is to share the financial risk and cashflow impact during the COVID-19 pandemic between landlords and tenants, on a temporary and case-by-case basis.

The Regulation requires:

• landlords and tenants to renegotiate the terms of the lease in good faith keeping in mind the principles under the Code; and
• the landlord to attempt to mediate the dispute with the Impacted Lessee, during the Prescribed Period.

Renegotiating can be about the rent payable under the lease or any other term of the lease, where negotiation must commence within 14 days of such a request being made.

Under the Code, landlords must offer their tenants (provided they qualify as an Impacted Lessee), a proportionate reduction in rent based on the decline in their turnover through a combination of:

• waiver of rent, with at least 50% of the total reduction over the Prescribed Period; and
• deferral of rent, which must be repaid over the balance of the lease term or at least 24 months (whichever is the greater, unless otherwise agreed).

Rental waiver and deferral must be up to 100% of the amount ordinarily payable by the tenant. No fees, interests or charges will apply in respect of the rental waivers or deferrals and any repayments may occur over an extended period after the COVID-19 pandemic ends.

In any case, the Code prohibits landlords from increasing the rent, except for retail leases that are based on turnover rent during the Prescribed Period and a reasonable subsequent recovery period which will be allowed to Impacted Lessees.

Demonstrating and comparing turnover decline

The Code requires Impacted Lessees to demonstrate a decline in their business' turnover of 30% or more by providing evidence of such decline to the landlord. These are expected to be demonstrated based on the below mentioned government grants ( 2021 COVID-19 Micro-business Grant 2021 COVID-19 Business Grant and 2021 JobSaver Payment).

Accordingly, the Impacted Lessee will need to show that they have suffered a decline of 30% of more in turnover for the period commencing 24 June 2021 for a minimum period of 2 weeks. This will need to be compared to the same period in the year 2019 or 2020.

Naturally, tenants will be inclined to choose historical periods, either in the year 2019 or 2020, to compare with the current period to demonstrate the greatest decline.

Who qualifies as an "Impacted Lessee"?

A tenant is an Impacted Lessee within the meaning of the Regulation if the tenant:

1. is a party to an Eligible Lease, as described above;
2. qualifies for one or more of the following government grants (with each requiring a minimum decline of 30% in turnover to qualify):
3. • 2021 COVID-19 Micro-business Grant;
   • 2021 COVID-19 Business Grant; or
   • 2021 JobSaver Payment;

3. had a turnover of less than $50 million in the 2020-21 financial year, where turnover also includes any turnover generated from internet sales of goods or services. It is important to note that if a lessee is a corporation that is part of a group, then the $50 million threshold applies to the whole group.

If you are an Impacted Lessee, the landlord cannot take a Prescribed Action against you.

What are the "Prescribed Actions" a landlord cannot take against the Impacted Lessee?

The Regulation contains an exhaustive list of what comprises a Prescribed Action. Simply put, a landlord is prohibited from taking any action under the lease or seek orders or issue proceedings against the Impacted Lessee for any of the following things:

• evict the Impacted Lessee;
• re-entry or recovery of the premises or land;
• seizure of goods, or forfeiture, or damages;
• require a payment of interest on, or a fee or charge related to, unpaid rent;
• recover the whole or part of a security bond (bank guarantee or security deposit);
• performance of obligations by the lessee or any other person pursuant to a guarantee under the commercial lease,
• possession,
• termination of the commercial lease,
• any other remedy otherwise available to a lessor against a lessee at common law or under the law of this State.

Disputes and compulsory mediation

The Regulation requires the landlord to not take any Prescribed Action against the Impacted Lessee during the Prescribed Period unless the matter has been referred to mediation under Part 8, Division 2 of the Retail Leases Act 1994 (NSW) and where the Registrar of the Retail Tenant Disputes at the Office of NSW Small Business Commissioner has certified in writing that mediation has failed and the Impacted Lessee has requested renegotiation where such renegotiation must commence within 14 days.

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.