In July, we wrote about the NSW government's introduction of new legislation to support retail and commercial tenants affected by the current lockdown. Under the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (the 2021 Regulation), "impacted lessees" are protected from a landlord taking certain actions to enforce the lease.
But what if you are struggling to meet rent demands or otherwise comply with your lease and you are not an impacted lessee under the 2021 Regulation? You may have other rights at law which can be utilised to either negotiate a commercial outcome with your landlord or to otherwise protect your lease interest.
By way of brief recap, under the 2021 Regulation an impacted lessee is a tenant:
- 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).
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.
On 13 August 2021, the NSW Government amended the 2021 Regulation to reintroduce the National Cabinet's Mandatory Code of Conduct (Code) to mandatory rent relief negotiations for eligible COVID-19 impacted retail and commercial tenants. Parties to an impacted lease are now obligated to renegotiate rent payable under the lease. To keep up to date with changes to the retail and commercial leasing landscape as a result of COVID-19, we encourage you to check our dedicated COVID-19 Leasing insights.
While we wait to see how the 2021 Regulations are applied from a practical perspective, important questions remain regarding what, if any, relief or rights exist for landlord and tenants under the 2020 regulations. During the height of the pandemic in 2020, the NSW Government introduced the legislation to support retail and commercial tenants affected by the current lockdown. Under the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (2020 Regulation), which was subsequently replaced by a second (2020 Regulation No 2) and eventually third (2020 Regulation No 3) (collectively, the 2020 Regulations).
The 2020 Regulations prohibited landlords from taking certain prescribed actions against a retail or commercial tenant, provided they were an impacted lessee within the meaning of those Regulations, for defaulting under their lease, including the non-payment of rent unless and until the parties renegotiated. Such renegotiations were to be conducted in accordance with the Code, which included that the tenant was entitled to rent relief commensurate with their downturn in revenue during the pandemic period.
Importantly, the Code required such relief to apply during the pandemic period, but also during a reasonable recovery period. Exactly what a reasonable recovery period was left unclear, with the Supreme Court of NSW finding on one occasion that a retail store was entitled to such relief for a reasonable recovery period of six months. Unfortunately, this leaves many landlords and tenants in an uncertain position as to how the Code continues to apply while commercial and retail tenants attempt to rebuild the trade that had been enjoyed prior to the start of the pandemic.
Although the Regulations have now been repealed, section 88 Retail Leases Act 1994 (NSW) (Act) gives continuing effect to the 2020 Regulation No 3 for anything occurring under a lease where one party is an impacted lessee. In short, an impacted lessee within the meaning of the 2020 Regulation No 3 may still be able to enforce its rights under that legislation. The most obvious continuing right would appear to be that a landlord could not take a prescribed action, such as terminating a tenant's lease, for a failure to pay rent during the period 1 January 2021 to 28 March 2021 unless the parties have first renegotiated the lease in accordance with the Code.
Although the amendments to the 2021 Regulation may alleviate some of the uncertainty around the continued application of the Code, there are undoubtedly a significant number of tenants unsure what, if any, rights they have to claim rent relief under the Code for the period 29 March 2021 until the commencement of the amended 2021 Regulation on 13 July 2021. For these tenants, the 2021 Regulation may have come too late particularly given a return to regular trade is still some way off.
Putting aside any renegotiation that may have taken place under the 2020 Regulations, including the application of agreed rent relief during a reasonable recovery period, is a tenant entitled to rent relief for the period prior to 13 July 2021? The obvious answer would be no, given there is no legislation plainly applying to that period of time. However, it may be that the Code could be argued to still apply during that period for retail tenants.
The most likely argument a retail tenant could make would be that a refusal to grant rent relief despite their trade remaining significantly reduced was unconscionable within the meaning of section 62B of the Act. The Code was clearly intended to apply during the COVID-19 period and it is clear that we are still within that 'period', given the current lockdown. If a tenant's trade has simply not recovered and, but for the lack of legislation strictly applying the Code during the relevant period, they would otherwise be entitled to rent relief under the provisions of the Code, a tenant may be able to argue that a refusal to grant rent relief is unconscionable. Clearly, the more severely affected the tenant's business, the more likely they will be to convince a court that refusing rent relief is unconscionable, however at least for now the argument remains untested before the courts.
Whether the 2021 Regulations are sufficient to allow commercial and retail tenants to survive through the latest lockdown remains to be seen. For some, it may depend on how strongly they were able to rebuild their trade during the year and whether that income will sustain them until the NSW government eases restrictions to allow somewhat normal trade to resume. If you are unsure of your rights as either a landlord or a tenant in light of the everchanging regulatory landscape, you should contact our office.
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.