08 July 2020
Retail and Commercial Tenancies – NSW COVID-19 Regulations
The Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (the ‘Regulations’) commenced on 24 April 2020 to give effect to the National Cabinet Mandatory Code of Conduct which was adopted by the National Cabinet on 7 April 2020 (the ‘Code’).
On 3 July 2020, the Regulations were amended by the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2020 (the ‘Amendments’). The Amendments provide important clarification of which tenants are entitled to rent relief and the rights of landlords to refuse to give rent relief.
How long do the Regulations apply for?
The Regulations take effect for six months, from 24 April 2020 until 24 October 2020 (the ‘prescribed period’).
What leases do the Regulations apply to?
The Regulations apply to retail leases and commercial leases (which may include licences and oral agreements).
The Regulations do not apply to new leases entered into after 24 April 2020 (but will apply to leases entered into after that date if pursuant to an option to renew or the renewal of an existing lease on the same terms).
Therefore, any tenant entering into a new lease on or after 24 April 2020 should be careful to negotiate commercial terms that will be suitable despite the uncertainties of the current environment.
What tenants do the Regulations apply to?
The Regulations apply to an ‘impacted lessee’, defined to be a tenant:
who qualifies for the JobKeeper scheme; and
whose turnover for the 2018 – 2019 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).
The recent Amendments clarify that the Regulations only apply to ‘impacted lessees’ and ‘impacted leases’. Prior to the Amendments, one reading of the Regulations suggested that certain parts related to all tenants and other parts only related to ‘impacted lessees’.
What do tenants have to do?
The Amendments also specify that a tenant must give the landlord:
a statement to the effect that the tenant is an ‘impacted lessee’; and
evidence that the tenant is an ‘impacted lessee’.
If the tenant fails to do so, the landlord is taken to have fulfilled its obligation to renegotiate in good faith and could proceed to take any prescribed action (see below) against the tenant for failure to pay rent. This applies to all negotiations which were commenced but not completed as of 3 July 2020.
Landlords prevented from taking action against tenants
If the Regulations apply, a landlord is prevented from taking any ‘prescribed action’ against a tenant – which includes eviction, claiming damages, accruing of interest, drawing on a security deposit/bank guarantee, or calling on a personal guarantee – unless and until the parties have attempted to renegotiate the terms of the lease.
The Regulations only apply to breaches occurring during the prescribed period and which relate to the non-payment of rent or outgoings. Therefore, a landlord could take prescribed action for any breaches which existed prior to 24 April 2020, or any other breaches not related to the economic impacts of the COVID-19 pandemic (such as if a tenant damages the property).
Matters to consider when renegotiating lease terms
If the Regulations apply, either party can request that the lease is renegotiated in good faith, having regard to the economic impacts of the COVID-19 pandemic (on both the tenant and the landlord) and the 14 leasing principles set out in the Code, which generally include proportionate rent waivers/deferrals, limited outgoings relief and amortised repayments - see our earlier article.
The Regulations make it clear that the parties are free to come to some other negotiated outcome on terms which do not strictly comply with the requirements set out in the Regulations and the Code.
Once the parties reach an agreement, they will need to consider how that agreement is documented, in order to avoid any uncertainty or enforceability issues down the track.
What if the Regulations don’t apply?
If the Regulations do not apply, a tenant is not automatically entitled to any protection or rent relief. The Code is not of itself enforceable law, and only applies to small-to-medium enterprise tenants. Parties to a lease where the tenant falls outside of the Regulations/Code are still encouraged to negotiate ‘in the spirit’ of the Code, even if there is no legislative compulsion.
If you are a landlord or a tenant and you require any assistance with any issues covered by this article, please do not hesitate to contact us noting we have launched a tailored fixed-fee rent reduction legal service.