As New South Wales is placed into another lockdown due to the spread of COVID-19, the NSW government has introduced a number of additional measures to assist businesses during this time. One of those measures is enacting the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (the 2021 Regulation) on 14 July 2021.
The 2021 Regulation seeks to support retail and commercial tenants currently affected by the decisions made by the NSW government to enact stay at home orders and harsh trading restrictions for retail businesses. These restrictions have limited the ability for a landlord to exercise certain rights, which it would otherwise have, against a tenant which has breached its lease by failing to make payments or failing to open for business.
So, what's different this time around?
Unlike the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (No 3) introduced last year (see our earlier insights on this: Sneakerboy and Mandatory Code of Conduct), the 2021 Regulation does not require the parties to renegotiate the terms of the lease or allow for rental waivers or deferrals consistent with the National Cabinet Mandatory Code of Conduct.
The 2021 Regulation prohibits a landlord from taking certain action under the provisions of a lease or bringing court action against an "impacted lessee" which is in breach of its lease during the period from 13 July 2021 to 20 August 2021 without first going to mediation.
What leases fall under the 2021 Regulation?
The 2021 Regulation applies to retail and commercial leases (which may include licences and oral agreements except new leases entered after 26 June 2021 (but will apply to leases entered after that date if pursuant to an option to renew or the renewal of an existing lease on the same terms).
Impacted lessees and new eligibility requirements under the 2021 Regulation
Under the 2021 Regulation, an impacted lessee is a tenant who:
- who qualifies for 1 or more of the following grants:
- Micro-business COVID-19 Support Grant;
- COVID-19 NSW Business Grant; or
- Job Saver Grant; and
- whose turnover for the 2020 - 2021 financial year was less than $50 million (at the franchisee level for a franchise, and at a group level if the tenant is a corporation that is a member of a group).
What action is prohibited?
If a tenant commits a prescribed breach in relation to a lease (i.e. by failing to pay rent or outgoings, or the business operating under the lease is not open for business during the hours specified in the lease), the 2021 Regulation prohibits landlords from taking prescribed action which includes, but is not limited to, evicting a tenant, exercising a right of re-entry into premises, seeking orders or commencing court action for recovery of premises, forfeiture, damages, possession or termination of the lease.
However, if the parties to the lease have attended mediation which has failed to resolve the dispute, a landlord may exercise its rights under the lease, including taking prescribed action against the tenant for breach of its obligations.
Despite this, it should be noted that the 2021 Regulation does not prevent a landlord taking prescribed action on grounds not related to the economic impacts of the COVID-19 pandemic (such as if a tenant damages the premises).
How should impacted lessees seek relief?
Tenants suffering from the effects of the lockdown and who wish to seek relief under the 2021 Regulation must give their landlord a statement to the effect that they are an impacted lessee and provide evidence of this. The 2021 Regulation does not specify what evidence is required but it will likely include management accounts or financial statements and evidence of the grant(s) received from the government.
Tenants should provide this information before the prescribed breach occurs or as soon as practicable after it has occurred.
If a landlord requests the above information, it must be given within a reasonable time after it is requested.
As stated above, unlike previous iterations of the regulations, there is no obligation for landlords to provide rent relief or for the parties to renegotiate the terms of the lease. However, commercial, retail and residential landlords will be eligible for a land tax concession where they grant rent relief or reduce the rent of their tenant.
The 2021 Regulation will no doubt provide much needed relief for retail and commercial tenants during the lockdown and beyond. Tenants who wish to seek relief should take immediate steps to apply for any government grants, prepare supporting evidence for the last financial year and inform their landlords that they are impacted by COVID-19. Landlords must ensure that before taking any action against tenants for breaches under a lease between 13 July and 20 August 2021, they consider whether the tenant is entitled to relief under the 2021 Regulation.
It is important to note that the 2021 Regulation is silent as to whether impacted tenants who commit a prescribed breach during the relevant period, such as failing to pay rent, will be required to pay back this rent. It is also unclear whether landlords can take future action against tenants for a breach during the prescribed period after this period has ended, meaning tenants are left without substantive protection beyond this lockdown period.
From a practical perspective, whilst the 2021 Regulation requires the parties to attend mediation before a landlord can take prescribed action, it is unlikely that the parties will be able to arrange mediation with the Small Business Commissioner before the prescribed period ends. Therefore, it is prudent that parties to a lease engage in commercial discussions now, noting that we may be in this lockdown for some time to come.
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.